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Fact & Fiction About “Earn Out" Provisions When Selling Your Business

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in The Business of Business Finance

Most of what you’ll read about “earn outs” warns of entrepreneurs being cheated out of significant parts of their company value because of unrealistic financial hurdles or accounting treatment that benefits the buyer rather than the seller. While there are many stories of disappointed company sellers, properly designed “earn outs” can be a very effective tool to help close a deal and reward entrepreneurs for the future value they create within their new enterprise.

I am currently working to finalize two deals where earn out provision will play a critical roll in a successful transaction for both buyer and seller.

The first is a government IT services firm with revenues that have leveled off at about $6.5 million over the past 3 years. Because of new contracts, they’re 2011 revenue will likely exceed $9 million. For personal reasons the owner (my client) wants to sell now and still be compensated for this future r...(register to read more)

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