Earn out

During my summer internship, I underwrote debt to fund acquisitions for healthcare real estate, which operates similarly to a corporation, with its value closely tied to its operations. Due to this, earn-outs were a key component in addition to the eligible loan amount.

• Earn-out

  • A type of payment that is contingent on future performance (EBITDA, revenue, profit targets must be met).

  • Is used commonly in M&A.

  • Once a company meets those targets, the seller/ loan taker may receive additional payments/ loans from the buyer/ lender beyond the initial purchase price/ loan amount.

• Pros

  • Aligns interests of buyer/ loan taker and seller/ lender after a transaction takes place.

  • Provides seller/ loan taker an opportunity to earn more money.

  • Mitigates the risk for the buyer/ lender.

• Cons

  • Creates uncertainty for those involved - especially the seller/ loan taker.

  • Can create an additional tax burden in the future since these are deferred payments.