Managing M&A Earnouts in a Pandemic
Among the many challenges in closing a M&A deal right now is developing a valuation approach that keeps a buyer and the sellers at the table. With business uncertainty comes extraordinary challenges in using discounted cash flow models to arrive at a valuation. Multipliers (i.e., valuing a company at a multiple of EBITDA or some other measure of business performance) are less reliable than in the past as revenue remains uncertain and industry comparisons may no longer be relevant. And stock-for-stock transactions, while appealing in certain contexts, may be difficult to justify under historically volatile market conditions.
In this article, we offer observations and suggestions for managing M&A earnouts, based on our record of working on hundreds of transactions that include earnout provisions and our experience managing a large number of earnout disputes.