Do acquisition earnouts increase business value?

BVWire–UKIssue #3-1
June 4, 2019

valuation method
earnout, cross-border transaction

It’s not uncommon that business valuation analysts need to consider the contingent value and costs of earnouts paid to the management of acquired companies. Monte Carlo or other option-modelling techniques are often applied for financial reporting and compliance valuations. BVWire—UK notes a very thoughtful examination last year by professors at the University of Edinburgh (Jo Danbolt and Leonidas Barbopoulos), with independent author Dimitris Alexakis that tested the value of earnouts in global diversification. They created a dataset of UK, North American, and Australian cross-border acquisitions between 1992 and 2012—and discovered that earnouts fail to enhance value except in the case of reducing the risk ‘firms initiating international business operations’ face. Earnouts didn’t contribute in domestic acquisitions, nor did they help for multinational companies who were adding to existing global assets, the three researchers learned!
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