There’s no question that every industry and organization in the world has been impacted by the COVID-19 pandemic. Perhaps as a result of that overall effect, Schneider Downs Consulting has seen an uptick lately in the utilization of earnout provisions.
For those not familiar, an earnout provision is an agreement between a buyer and seller to share in the risk and reward of future operations of an organization after the transaction close. It’s commonly referred to as contingent consideration because the payment from the buyer to seller is contingent on the company meeting certain thresholds.
With many financial results being impacted by COVID-19, these provisions have provided an opportunity for sellers to reach pre-pandemic and reach valuations they might have seen prior or, conversely, the opportunity that the changes are going to stay. A September 2020 article in the Wall Street Journal, “Earnout Provisions Regain Popularity as Investors Address Market Uncertainty” by Laura Kreutzer, cites one estimate that claims 50% of recent transactions had earnouts, compared to pre-pandemic levels closer to 20% (after removing the life sciences industry).
And the crafting of these agreements cannot be overlooked. Even prior to the pandemic, Schneider Downs Consulting saw several of these provisions lead to litigation.
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