{"id":36488,"date":"2018-12-10T23:11:46","date_gmt":"2018-12-10T20:11:46","guid":{"rendered":"http:\/\/koumentakislaw.gr\/blog\/articles\/earnouts-eykairia-gia-symfonies-h-skopelos\/"},"modified":"2019-03-27T07:36:08","modified_gmt":"2019-03-27T04:36:08","slug":"earnouts-opportunity-for-agreement-or-a-block","status":"publish","type":"post","link":"https:\/\/koumentakislaw.gr\/en\/articles\/earnouts-opportunity-for-agreement-or-a-block\/","title":{"rendered":"Earnouts: Opportunity for Business Agreements or a \u201cstumbling block\u201d?"},"content":{"rendered":"<p>[vc_row][vc_column][vc_column_text] To its basic structure, <strong>earnouts<\/strong> are agreements concluded between (usually) a seller and a buyer of a company. It is mainly found in <strong>M&amp;A agreements or as a tool to promote startup financing<\/strong>.<\/p>\n<p>When an earnout is agreed on, the buyer agrees to pay, in addition to the cost of acquiring a company itself, a \u201cbonus\u201d &#8211; under certain conditions.<\/p>\n<p><strong>The necessity<\/strong><\/p>\n<p>When there are <strong>strongly conflicting interests<\/strong> (and usually there are), a deal is almost never easy to be achieved. The seller will always claim that its company is worth more, while the buyer will claim the exact opposite. Of course, no one is able to prove the company\u2019s \u201cactual\u201d value. Earnout comes in to solve this problem.<\/p>\n<h3><strong><img loading=\"lazy\" decoding=\"async\" class=\"alignleft wp-image-36483\" src=\"http:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik.jpg\" alt=\"\" width=\"500\" height=\"281\" srcset=\"https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik.jpg 1920w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik-300x169.jpg 300w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik-768x432.jpg 768w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik-600x338.jpg 600w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik-870x489.jpg 870w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Koumentakis-and-Associates-article-makedonia-lida-koumentaki-earnout-dispute-freepik-420x236.jpg 420w\" sizes=\"auto, (max-width: 500px) 100vw, 500px\" \/>Earnouts<\/strong><\/h3>\n<p>The logic is simple: The sale of a company, if an earnout is included, is agreed at a price closer to what was offered by the buyer. Nonetheless, the seller will not suffer a loss in case the company is actually worth more than what the buyer was initially offering. <strong>To achieve that, both the buyer and the seller set specific targets for the company<\/strong>. In case the targets are achieved, the seller will have \u201cproved\u201d that its company is worth more than what it has already received, and therefore will be entitled to receive a beforehand agreed upon bonus.<\/p>\n<p>This bonus will not necessarily be a specific amount: Its type and method of calculation are left to the discretion of the parties (e.g. it can be agreed that if the sold company has a certain revenue in z years, the seller of the company shall remain its CEO for x years with a salary amounting to y).<\/p>\n<p><strong>Examples<\/strong>:<\/p>\n<ul>\n<li>The seller will receive a percentage (e.g. 2%) of the company\u2019s profits for the next three years.<\/li>\n<li>The seller will be the company\u2019s CEO for four years following its buy-out, during which, if certain revenue goals are achieved, the seller will get a bonus for every 10% the company\u2019s revenue has exceeded that of the previous year.<\/li>\n<\/ul>\n<p>It truly can be anything. If the seller is confident about the capabilities of its company, it is easy to take the risk that his fee be dependent on his company\u2019s performance.<\/p>\n<p>This is, of course, a simplified approach.<\/p>\n<h3><strong>Risks and Opportunities<\/strong><\/h3>\n<p>While earnouts seem to be simple and attractive, they entail many risks. What if, in our first example, the buyer makes sure that the profits of the company for the first few years after the buy-out are hidden, by exaggerating, say, the costs? One solution would be for the seller to remain in the company\u2019s management, as in our second example. Another would be that the earnout will depend on other factors such as, for example, the company\u2019s turnover or it position in the market.<\/p>\n<p><strong>Earnouts are introduced as an attempt to solve the problem of pre-sale moral hazard.<\/strong> Prior to the sale, the seller will try to inflate the value of the company, while the buyer will try the exact opposite. Earnouts successfully, in my opinion, address this matter. But earnouts themselves will introduce a \u201cnew\u201d moral hazard, after the sale of the company. After the sale, the buyer will try to \u201chide\u201d the factors that will trigger the earnout while the seller will try to highlight them.<\/p>\n<p>It is obvious that earnouts have to be tailored to any case, in order for all parties involved to be as secured as possible. Nevertheless, <strong>with the right planning (when negotiating as well as drafting the agreement), earnouts can solve problems that may otherwise prevent a deal from closing.<\/strong><\/p>\n<p>I believe we all agree that the most important job lawyers have is to close the deal their clients want closed, while, of course, protecting them. Earnouts are a good way to save an otherwise \u201cdead\u201d deal: when without an earnout the buyer and the seller do not have the same perspective, <strong>earnouts give both parties time to \u201clook through each other\u2019s eyes\u201d. And, ultimately, make profitable business transactions.<\/strong><\/p>\n<h4><a href=\"http:\/\/koumentakislaw.gr\/omada\/lida-koumentaki\/\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-34894 size-thumbnail\" src=\"http:\/\/koumentakislaw.gr\/wp-content\/uploads\/2016\/04\/Koumentakis-and-Associates-Lida-Koumentaki-242-300-150x150.jpg\" alt=\"\" width=\"150\" height=\"150\" srcset=\"https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2016\/04\/Koumentakis-and-Associates-Lida-Koumentaki-242-300-150x150.jpg 150w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2016\/04\/Koumentakis-and-Associates-Lida-Koumentaki-242-300-80x80.jpg 80w\" sizes=\"auto, (max-width: 150px) 100vw, 150px\" \/><\/a><\/h4>\n<h4><a href=\"https:\/\/koumentakislaw.gr\/en\/the-team\/lida-koumentaki\/\">Lida Koumentaki<\/a><br \/>\n<em>Junior Associate<\/em><\/h4>\n<p>\u03a5.\u0393. The article has been published in MAKEDONIA Newspaper (December 9, 2018).<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-36485 size-medium\" src=\"http:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-300x169.jpg\" alt=\"\" width=\"300\" height=\"169\" srcset=\"https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-300x169.jpg 300w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-768x432.jpg 768w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-600x338.jpg 600w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-870x489.jpg 870w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout-420x236.jpg 420w, https:\/\/koumentakislaw.gr\/wp-content\/uploads\/2018\/12\/Lida-Koumentaki-Article-efhmerida-MAKEDONIA-earnout.jpg 1920w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_column_text] To its basic structure, earnouts are agreements concluded between (usually) a seller and a buyer of a company. It is mainly found in M&amp;A agreements or as a tool to promote startup financing. When an earnout is agreed on, the buyer agrees to pay, in addition to the cost of acquiring a company itself,&#8230;<\/p>\n","protected":false},"author":9,"featured_media":36482,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[206],"tags":[497,530,529,528],"class_list":["post-36488","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","tag-acquisitions","tag-business-agreement","tag-legal-advisors","tag-mergers"],"_links":{"self":[{"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/posts\/36488","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/comments?post=36488"}],"version-history":[{"count":6,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/posts\/36488\/revisions"}],"predecessor-version":[{"id":37073,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/posts\/36488\/revisions\/37073"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/media\/36482"}],"wp:attachment":[{"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/media?parent=36488"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/categories?post=36488"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/koumentakislaw.gr\/en\/wp-json\/wp\/v2\/tags?post=36488"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}