Earn-outs are provisions in which the seller of a business receives additional future payments based on the achievement of certain future financial goals by the target. These provisions can effectively contribute to bridging the gap between buyer and seller and hence facilitate a transaction, especially in times of increased uncertainty regarding the future economic development of the business. This paper presents a model for valuing the contingent claim associated with earn-out clauses. The proposed model is based on option pricing theory, and its implementation is straightforward.
Copyright American Society of Appraisers
The information contained in this product is based on content obtained by ASA from sources considered to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. BVR and ASA accept no liability for the use of such information which is provided "AS IS" and with no warranties, express or implied.