Happy New Year and welcome to this issue of Business Matters, the newsletter of Clark Wilson’s Private Company Transactions Group.
As many private company owners know, the last couple of years have been difficult ones for private company purchase and sale transactions. The purchase price expectations of buyers and sellers diverged with buyers (and their lenders) looking for lower prices in the midst of an economic downturn and sellers hoping to achieve higher prices on the prospects of recovery. To bridge this gap we have seen a resurgence in the use of the earn-out clause, which is most typically a formula by which the vendor of a business receives a portion of the purchase price over time, subject to the business achieving certain levels of sales or profitability over that time.
An earn-out clause can be particularly beneficial for a buyer as it minimizes the risk of overpaying for the business and provides incentive for the vendor to ensure the business continues to perform well after closing. For the seller, an earn-out clause may facilitate a sale which would not have otherwise occurred. It is probably too early to say if the resurgence of the earn-out clause is temporary or part of a longer term trend, however, from our vantage point, we believe it is likely to be with us for the next several years, especially for businesses which are difficult to value.
We wish you all a healthy and prosperous 2011. We are optimistic that the year ahead will be a good one for private company mergers and acquisitions.