E37: DealCon Roundup Part 2: Earnouts in Agency M&A

Description

Summary

In this episode of the Inorganic Podcast, co-hosts Ayelet Shipley and Christian Hassold discuss the complexities of earnouts in agency acquisitions in the context of discussions covered at DealCon 2025. In this episode, Ayelet and Christian explore the reasons earnouts are used, the difficulties in negotiating them, and the importance of maintaining operational control and alignment between buyers and sellers. The conversation emphasizes the need for clear expectations and mutual understanding to navigate the intricacies of earnouts effectively.

Takeaways

Earnouts are often used to bridge valuation gaps in acquisitions
Buyers typically dislike the complexity of earnouts but find them necessary
According research, significant percentage of earnouts (>55%) are never paid
Negotiating earnouts should ideally happen early in the deal process
Operational controls are necessary for buyers and sellers to achieve earnout targets
Cultural alignment between buyers and sellers is essential for success
Earnouts should generally not exceed 15-20% of the total transaction value
Protracted earnout negotiations can lead to deal fatigue, which can pose risk to deal timeline or completion

Chapters

0:26 Introduction to Earnouts

1:05 Why Earnouts Are a Key Topic

1:34 The Purpose and Function of Earnouts

02:21 Common Uses of Earnouts in M&A

3:45 Challenges in Structuring Earnouts

5:58 Pipeline Credit and Control in Earnouts

10:24 Negotiating Earnouts & Deal Fatigue

12:05 Maintaining Seller Control for Earnout Success

15:15 Cultural Alignment in Earnout Negotiations

14:41 Structuring Earnouts Strategically

16:29 Key Takeaways on Earnouts