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Structuring Earnouts: Data Insights from 50 M&A Transactions
Earnouts are stipulations within deal terms where the seller of a business can receive additional payments based on the future performance of the business being sold.
Having become increasingly popular in today’s deal structures, earnouts have multiple purposes, which include:
- Aligning management teams with business results
- Bridging buyer-seller valuation gaps
- Allowing buyers to preserve capital when a deal closes and pay it out when they have surplus capital derived from business over-performance
Today, we’re sharing a select set of Axial platform data from successfully consummated transactions that included an earnout element in the deal structure.
The data included in this piece comes from a limited set of 50 Axial member transactions. Our inferences are only meant to be an indicative representation of potential trends across the lower middle market. This is not a comprehensive study.
Select Single-Term Earnouts
| Industry | Firm Type | Revenue | EBITDA | TEV | EBITDA Multiple | Earnout | Total Deal Size | Earnout % | Stage |
| Healthcare | Independent Sponsor | $3,994,000 | $705,000 | $4,425,000 | 6.28 | $100,000 | $4,525,000 | 2.21% | Missed |
| Technology | Private Equity | $89,800,000 | $3,200,000 | $22,000,000 | 6.88 | $4,000,000 | $26,000,000 | 15.38% | Paid |
| Industrials | Independent Sponsor | $26,000,000 | $4,100,000 | $22,000,000 | 5.37 | $3,000,000 | $25,000,000 | 12.00% | Missed |
| Technology | Private Equity | $7,200,000 | $1,300,000 | $15,000,000 | 11.54 | $3,750,000 | $18,750,000 | 20.00% | Paid |
| Healthcare | Corporation | $13,000,000 | $1,200,000 | $14,000,000 | 11.67 | $2,000,000 | $16,000,000 | 12.50% | Paid |
| Industrials | Independent Sponsor | $16,700,000 | $3,300,000 | $11,450,000 | 3.47 | $1,025,000 | $12,475,000 | 8.22% | Paid |
| Education | Independent Sponsor | $4,500,000 | $2,300,000 | $11,750,000 | 5.11 | $2,500,000 | $14,250,000 | 17.54% | Missed |
| Business Services | Family Office | $9,700,000 | $1,800,000 | $7,750,000 | 4.31 | $4,000,000 | $11,750,000 | 34.04% | Paid |
| Transportation | Independent Sponsor | $9,700,000 | $1,300,000 | $18,250,000 | 14.04 | $1,750,000 | $20,000,000 | 8.75% | Paid |
| Technology | Independent Sponsor | $5,580,000 | $3,250,000 | $23,700,000 | 7.29 | $1,430,000 | $25,130,000 | 5.69% | Missed |
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Select Multi-Term Earnouts
| Industry | Firm Type | Revenue | EBITDA | TEV | EBITDA Multiple | Total Earnout | Total Deal Size | Earnout % | Earnout Results By Term | |
| Consumer Goods | Corporation | $7,100,000 | $2,600,000 | $7,500,000 | 2.88 | $5,000,000 | $12,500,000 | 40.00% | 1st Earnout | Missed |
| 2nd Earnout | Paid | |||||||||
| Real Estate | Private Equity | $16,700,000 | $3,100,000 | $6,600,000 | 2.13 | $1,500,000 | $8,100,000 | 18.52% | 1st Earnout | Missed |
| 2nd Earnout | Missed | |||||||||
| Technology | Holding Company | $7,200,000 | $1,300,000 | $3,500,000 | 2.69 | $1,500,000 | $5,000,000 | 30.00% | 1st Earnout | Paid |
| 2nd Earnout | Paid | |||||||||
| Business Services | Private Equity | $4,380,000 | $270,000 | $1,800,000 | 6.67 | $1,600,000 | $3,400,000 | 47.06% | 1st Earnout | Paid |
| 2nd Earnout | Pending | |||||||||
| Technology | Private Equity | $27,100,000 | $3,400,000 | $21,500,000 | 6.32 | $9,000,000 | $30,500,000 | 39.51% | 1st Earnout | Paid |
| 2nd Earnout | Paid | |||||||||
| 3rd Earnout | Pending | |||||||||
Earnouts By Company Type
Corporations and holding companies typically make acquisitions using cash from their own balance sheets, while private equity firms and independent sponsors rely on capital from limited partners. Since corporations and holding companies use their own capital as the equity source —and generally use less debt — they may be more inclined to reduce their initial check size. As a result, it appears that these buyers more often provide the acquired company with incentives to outperform, rewarding them after achieving a solid return on the initial capital investment.
Earnout Percentage YoY
Based on the above, earnouts were, on average, a more significant percentage of total enterprise value (TEV) in 2021 than in any other year. This was also the most attractive interest rate environment for the last four years. According to this data, it would seem that the earnout percentage of total TEV may be inversely correlated with interest rates at the time (lower the interest rates = higher the earnout percentage).
Deal Size vs. Earnout Percentage
Looking at the chart above, there is a small correlation between these Axial members’ total deal size and their earnout percentage. On the margin, smaller deals have a greater percentage of their TEV structured as an earnout than larger deals. This is likely because buyers & investors of these deals may have less access to capital (for their equity check) at the time of close. They may be more willing to give a greater total payout to the owner if the business does well, deriving those payouts from the business’s cash balance.
Does Size Matter? Missed vs. Paid Earnouts
Earnouts that represent a greater percentage of TEV are, on the margin, more frequently attained. This would suggest that increasing the portion of the total TEV structured as an earnout has its benefits, as management teams have greater skin in the game to outperform.
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