here's the scoop: I'm working on a sell side deal in which there is a cash-at-close amount and an earn out amount ($3mm over 4 years) that combine to get the total EV of the deal (roughly north of $40mm). The acquiring company is trying to buy this company, grow it over next 5 years, and sell it for $80mm.
Problem: The concern of the seller is that the new buyers will put so much effort / $$ into sales and other overhead costs that it will lessen the EBITDA and not allow them to hit the $9mm projected bogey required for the earn out.
I want to come up with some possible alternative scenarios that would be good for both the buyer and the seller. But the analyst who sent me the model did not include details about the expenses and how they could possibly be altered so that the $9mm projected EBITDA can be met in a different way. SO, are there (A) other ways to alter the model to get a favorable result that I am missing or (B) should I try to work backwards and have the model do what I want.
I've emailed my analyst and got a response similar to that of Bill Lumbergh in office space.
Please give an intern some guidance so as to keep his head from being removed at work.
Why say you're a portfolio manager on your profile but a intern on this thread. Those are 2 galaxies apart.
Have not updated it my b
Assuming you're wondering why, I was a portfolio manager through a program during my undergrad
oh nice! Congrats on getting in IB.
therealwolf
This is why sell side advisors dislike earn outs. These items should be part of negotiations and less an exercise around EBITDA. Specific language should be placed to exclude significant capex or sales and marketing expenses that would inhibit the seller's ability to obtain the earn out.
There are various ways to attack this problems besides language, such as basing the earn out off of some other metric (e.g. EBITDA less capex), setting a standard capex and/or sales and marketing budget that ties to historical spend as a % of revenue, etc.
Only thinking about this for 10 seconds, why not let the sellers just keep some equity, get a convertible note, tie the earn-out to the exit, etc...or some combination of those.
I'm with Bullet-Tooth Tony on this; you need to think about this conceptually in terms of what each side wants/incentives and how to satisfy both, not satisfying some BS EBITDA #.
As an aside, don't put "PM" in your profile just because you help manage a $10,000 fund for some club at your school...it's very misleading out of context...
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