Earn-out
Austria, Czech Republic, Poland and Hungary
Earn-outs are used both to bridge valuation gaps between buyers and sellers and to incentivise the selling management team to stay on in the business, help with integration, and drive future performance. Unlike the equity issued to management on a PE deal, the upside of an earn-out is commonly capped, but it may be easier to achieve the target than performing above the third-party and shareholder debt hurdles set in a private equity structure (but, of course, this will depend on where the targets are set).
Having less control over the business could also mean that achieving the target is not entirely in the hands of management (e.g., does the business require investment from its owners, could business be diverted away from it, or could employee numbers be cut?). This means you should pay close attention to the contractual restrictions on the buyer and its obligations to assist you in achieving the earn-out targets. Remember that the people you are dealing with at the buyer and/or their priorities may change over the course of an earn-out period, so you could be caught out if you have not built the appropriate guardrails into your documents.
It is worth considering the culture of the buyer in helping previous sellers achieve their own targets, and you should also consider what happens if you leave the business before the earn-out is paid out. In some circumstances, if you are a "good leaver", for example, if you are unwell, retire or die, you may be permitted to keep a greater share of the proceeds than if you are a "bad leaver", for example if you are dismissed or resign.
It is particularly important to structure earn-outs correctly for tax reasons (see Part 3 for further details).
Slovakia
Earn-outs are used both to bridge valuation gaps between buyers and sellers and to incentivise the selling management team to stay on in the business, help with integration, and drive future performance. Unlike the equity issued to management on a PE deal, the upside of an earn-out is commonly capped, but it may be easier to achieve the target than performing above the third-party and shareholder debt hurdles set in a private equity structure (but, of course, this will depend on where the targets are set).
Having less control over the business could also mean that achieving the target is not entirely in the hands of management (e.g., does the business require investment from its owners, could business be diverted away from it, or could employee numbers be cut?). This means you should pay close attention to the contractual restrictions on the buyer and its obligations to assist you in achieving the earn-out targets as well as the precise calculation mechanism of the earn-out reflecting changes in the business. Remember that the people you are dealing with at the buyer and/or their priorities may change over the course of an earn-out period, so you could be caught out if you have not built the appropriate guardrails into your documents.
It is worth considering the culture of the buyer in helping previous sellers achieve their own targets, and you should also consider what happens if you leave the business before the earn-out is paid out. In some circumstances, if you are a "good leaver", for example, if you are unwell, retire or die, you or your estate may be permitted to keep a greater share of the proceeds than if you are a "bad leaver", for example if you are dismissed or resign.
It is particularly important to structure earn-outs correctly for tax reasons (see Part 3 for further details).