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M&A with a Twist: The Growth-Share Structure (Earnout)

An uncommon and innovative approach in mergers and acquisitions. 

Here is what you need to know.

Components:

  1. Performance Indicators: The metrics used to measure the business’s success, such as customer satisfaction, employee retention, market share, and others.
  2. Payment Plan: The schedule and calculation of payments, which can be based on performance targets.
  3. Success Triggers: The conditions that signal the end of the Growth-Share period, such as reaching a specific market position, launching a new product, or fulfilling customer milestones.

Advantages:

  • Aligned Interests: By linking the purchase price to the success of the business, a Growth-Share structure promotes a shared goal for growth and aligns the interests of both the buyer and seller.
  • Deferred Payment: The buyer can defer a portion of the purchase price until the success of the business is demonstrated, reducing the upfront risk.
  • Minimized Risk: The buyer pays only for the success of the business, minimizing their risk.

Disadvantages:

  • Complexity: Negotiating a Growth-Share structure can be complex, particularly if there are disagreements about the performance indicators or payment plan.
  • Uncertainty: The seller may only know how much they will receive at the end of the Growth-Share period, creating uncertainty.
  • Conflict: The Growth-Share structure can lead to conflicts between the buyer and seller, especially if the performance indicators or payment plan are not well-defined.

Steps:

  1. Identify Performance Indicators: The first step is to determine the performance indicators that will influence the payment, which should be relevant to the business and indicative of its future success.
  2. Negotiate Payment Plan: The next step is to negotiate the payment plan, including the timing and calculation of the payments, ensuring both buyer and seller interests are taken into account.
  3. Define Success Triggers: Clearly define the conditions that signal the end of the Growth-Share period, such as reaching a specific market position, launching a new product, or fulfilling customer milestones.

Conclusion: 

The Growth-Share structure in M&A is an uncommon and innovative approach that promotes a shared goal for growth and minimizes the buyer’s risk. It is important to carefully consider the advantages and disadvantages and structure the arrangement equitably for both parties involved.