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

21 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Scott Stiegler

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Abstract

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.

Excerpt

UVA-F-1322

Rev. Feb. 11, 2014

STRUCTURING AND VALUING INCENTIVE PAYMENTS IN M&A:

EARNOUTS AND OTHER CONTINGENT PAYMENTS TO THE SELLER

Betting isn't always risky. In some cases, it actually reduces risk by sharing it among two or more parties.

—Bazerman and Gillespie (1999)

. . .

Keywords: investment analysis, earnout, mergers & acquisitions, incentive payment, Monte Carlo simulation

Suggested Citation

Bruner, Robert F. and Stiegler, Scott, Structuring and Valuing Incentive Payments in M&A: Earnouts and Other Contingent Payments to the Seller. Darden Case No. UVA-F-1322, Available at SSRN: https://ssrn.com/abstract=1279293 or http://dx.doi.org/10.2139/ssrn.1279293

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://faculty.darden.edu/brunerb/

Scott Stiegler

affiliation not provided to SSRN

No Address Available

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