Earnouts

Many earnouts are event driven with payment depending upon, for example, a scientific test result. These earnouts are easy to value, given forecasts of the likelihood of the event. Other earnouts are tied to market-related business results, such as achieving levels of revenues or earnings. If the earnout is non-linear, that is if it is subject to thresholds or its percentage participation changes as the level of sales or earnings changes, then it is technically difficult to value even given forecasts. My paper “Valuing Contingent Consideration Using Option Pricing,” Business Valuation Review 30 4 (2011) 121 - 131 describes how to value complex earnouts.

See the Valuation Case Studies for an example of an Earnout Valuation.

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