Modeling Impact of Earn-outs?
Can someone explain how to model an earnout?
Trending Content - Private Equity Forum
Career Resources
WSO Free Modeling Series - Now Open Through
June 30, 2026
9 Free Financial Modeling Lessons
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
+Bonus: Get 27 financial modeling templates in swipe file
+Bonus: Get 27 financial modeling templates in swipe file
High Finance Applications
Guaranteed
Get at least one offer GUARANTEED
- 1:1 support
- 92% success rate
- 2,000+ mentor network
- Unlimited Live bootcamps
- AI for resume + LinkedIn
- Networking automation tools
- HireVue simulation tool
- Full course library
- Private Slack community
- 20hrs of mocks
- + much more...
Book a liability at close (contingent consideration) for the earnout amount. Goodwill will increase to account for this.
When it comes to paying it make sure you build the logic in dynamically so that if you toggle your cases the earnout will flow automaticslly. I’d leave the IS alone though technically I think you book a loss or gain depending on if you are going to have to pay it. Then you have the payment flow through your cash from financing. If you don’t have enough cash on hand to pay it then you have to build in either additional debt or equity.
That’s pretty skinny and the BS stuff might not really matter if it’s a skinny model vs. a three statement.
It's an exceptional non-P&L expense so indeed no change on the IS. I agree that I wouldn't bother with the b/s portion. To part you forgot is to add the liabilities to your net debt at closing, and as you project to pay the earnout the cash goes out of the door but the liability in your net debt reduces. As a side note you can't raise additional debt to pay earn-outs, no one will finance this - needs to be from cash on hand or equity.
Thanks! So what are the financial statement impacts if they company does not hit the earn-out targets? The contingent liability is forgiven. Do you recognize a gain / pay taxes on the gain? Also do you impair goodwill at all? Do you have to evaluate the contingent liability every quarter or just when the earn-out target is hit / not hit?
Don’t overcomplicate it. The only thing you’ve done by adding an earn out to net debt is telling the seller that he needs to pay for it as you’re paying for the EBITDA in the business plan - ie if he wants you to recognise the financial benefit of his add on in full, then he needs to pay for that said add on in full. If the addon underperforms and doesn’t make the earn out then the contingent liability simply goes away and you remove it from net debt. You’d re-evaluate the earn outs amounts when you reforecsdt the business plan
I would disagree with your point on no lenders would fund an earnout. Depending on your earnout structure if the net result of hitting the earnout is that the portco has additional debt capacity lenders will fund that so long as you’re within the agreed upon leverage ratios / covenants.
I meant the actual cash out amount itself. Clearly you can leverage m&a from the add on
edit: wrong chain
At enim molestiae tempora tempora distinctio molestiae. Maiores voluptas consectetur culpa quod earum dolorem tempora. Voluptatibus et porro eius est et. Rerum vel delectus est atque repellendus minus rerum. Perferendis alias magni ea et nam. Iure voluptas possimus soluta autem necessitatibus tempora. Non voluptatibus veritatis ratione enim sed debitis.
Itaque suscipit ut ipsa ab similique alias rem. Impedit qui aut reiciendis rerum qui. Et sapiente reprehenderit eos libero a eos neque.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...