Mergers and acquisitions have become a staple of growth in Austin, especially among startups. When buyers and sellers disagree on a company’s valuation, earnout pricing becomes a useful tool. It allows parties to defer a portion of the purchase price, tying it to post-closing performance metrics. While earnouts can bridge valuation gaps, they also introduce legal and operational risks that must be managed with precision. Attorney Sasha Begum understands the finer details of earnout pricing in Austin mergers and acquisitions, and is here to answer any questions you might have.
An earnout is a type of pricing structure used in mergers and acquisitions. Instead of simply setting a sale price, the seller “earns” a portion of the purchase price based on how the business performs after the transaction is complete.
These contracts typically come with benchmarks intended to measure the success or failure of an organization moving forward. They use an array of metrics, including revenue threshold or EBITDA levels, to measure success. It is crucial that the agreement clearly sets out how these benchmarks are calculated and measured.
Getting the details of earnout pricing right during Austin mergers and acquisitions is crucial. The good news is that you never have to tackle this challenge alone.
Earnouts must be customized to each transaction. The choice of performance metric must reflect the nature of the business and be easy to track over time. The earnout period can range from one to five years, and the timing of payments should be carefully coordinated with operational forecasts. But even more critical is determining who controls the business after closing. If the seller remains in a leadership role, they may feel more confident in their ability to meet the agreed-upon benchmarks. Conversely, if the buyer assumes full control, sellers often insist on covenants that prevent major changes in business strategy or cost-cutting that could undermine performance.
Disputes frequently arise when accounting methodologies are not clearly defined. Even small shifts in how revenue is recognized, or expenses are allocated, can affect whether an earnout target is reached. For that reason, parties must agree in advance on accounting standards and how disputes over financial reporting will be resolved. Our attorneys can answer questions about earnout pricing in mergers and acquisitions in Austin.
Despite the potential benefits, earnouts carry inherent risk. Sellers may lose control of the business and find themselves at the mercy of buyer decisions. Buyers, on the other hand, may feel restricted by promises to maintain legacy practices or investment levels that no longer serve the company’s evolving goals.
Disputes often arise when performance metrics are not met, and the seller believes that the buyer’s actions interfered with their ability to achieve targets. For example, a reduction in sales staff, a shift in marketing strategy, or the loss of a key client could all affect financial performance, and trigger arguments over whether the earnout should still be paid. Many of these disputes end in costly litigation, underscoring the need for airtight language and pre-agreed methods of resolution, such as binding arbitration.
Earnouts are a viable strategy for mergers and acquisitions, but only if they are structured properly. At Begum Peláez-Prada PLLC, our firm is prepared to ensure that your deal is structured in a way to protect your interests. To discuss earnout pricing in Austin mergers and acquisitions, contact us for a private consultation as soon as possible.
