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WIN-WIN: Earnouts / Forgiveable Promissory Notes

Time will tell

When selling a business, an earnout or foregivable promissory note is a Buyer’s commitment to pay the Seller a certain amount of money tied to future performance after a sale. It bridges a valuation gap between what the Seller wants out of the business or future contracts are expected but not confirmed, and what the Buyer can safely pay.  This is simply a risk mitigation tool.

Thus, earnouts will most likely play a bigger part of deal structure in the months ahead.

Some advisors have a negative opinion on earnouts, telling Sellers not to expect a dollar of their earnout agreement. In our experience, those fears are unfounded, particularly when agreements are negotiated by an experienced M&A attorney.

Truthfully, most Buyers would love to pay the difference-be it an earnout or forgivable promissory note-because that means they are making more money, a true win-win.