With regard to the agreed ratio, the parties must also agree on accounting principles and clear rules for determining the agreed financial ratio, for example: whether gross or net turnover should be taken into account or whether discounts, charges, skonti and other turnover reductions are to be taken into account. An Earnout is a contractual provision stipulating that the seller of a company will receive additional remuneration in the future if the company achieves certain financial goals, usually expressed as a percentage of turnover or gross profit. The financial metrics used to determine the earnout must also be defined. Some metrics benefit the buyer, while others benefit the seller. It`s a good idea to use a combination of metrics like revenue and profitability metrics. There are both pros and cons for buyers and sellers in a Earnout. For the buyer, the advantage is to have a longer period to pay for the deal, rather than everything in advance. If the gain is not as high as expected, the buyer does not have to pay as much. For the seller, the advantage lies in the possibility of spreading the taxes over a few years in order to reduce the tax impact of the sale. There are a number of important considerations, with the exception of cash compensation when structuring an earnout. This includes designating the key members of the organization and including a earnout. Non-financial ratios, such as. B the maintenance of customer relations, can be obtained to determine the variable elements of the purchase price (e.g.
B if the determination of the purchase price is based in one way or another on these customer relations). In order to take account of this uncertainty, the Earnout clauses provide for the obligation for the buyer to pay, under certain conditions, an additional amount to the agreed purchase price (i.e. a variable “earnout payment”) at the end of the spa. .