Earn-out modelling LBO

Hi, if the sponsor pays an extra x$ through the holding period as earn-out to the seller, how do i model this correctly given min cash balance and full cash sweep?

Tried plugging it into the CFS under Cash flow from investing, but BS doesnt balance (debt just lower however asset side stays the same).

Do I have to model a contingent liability (thought this is only modelled if earn-out is part of the initial transaction value, e.g. if only 80% paid at closing)

Thank you!

 

its part of modelling test; stating the PE will pay x$ additional in year x if EBITDA bigger than x.

I see two options here; either putting a contingent liability on the BS, which gets reduced in year x (simplified not as write down on IS but just as payout on CFS so it balances) OR at exit, by substracting the amount of the earnout from the overall Equity available.

 

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