Business Case Studies & Business Publications

Structuring and Valuing Incentive Paymen...

Bruner, Robert F.,...

Technical Note

Structuring and Valuing Incentive Payments in M&A: Earnouts and Other Contingent Payments to the Seller

Bruner, Robert F.; Stiegler, Scott

F-1322 | Published December 12, 2001 | 21 pages Technical Note

Collection: Darden School of Business

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This technical note introduces students to the use of earnouts and other forms of incentive payments in the context of mergers and acquisitions. The note describes the use of incentive payments in M&A, recent deals in which earnouts were used, the trend and volume of earnout deals, the benefits and disadvantages of earnout structures. The large concept in the evaluation of earnouts is their similarity to call options. This conceptual approach provides the foundation for considering how an earnout might best be structured, and how its value might be estimated. The note concludes with a generic valuation example and refers the reader to a spreadsheet model that might serve as a template for future assessments of earnouts.