More evidence of economic rebound: new study analyzes earnouts as a portion of purchase consideration

BVWireIssue #108-2
September 21, 2011

“The mergers and acquisitions (M&A) market generally rebounded with more transactions and a higher median purchase price than in 2009,” says the latest (10th annual) Purchase Price Allocation Study by Houlihan Lokey (HL), the first time the study has analyzed earnouts, or contingent consideration (CC), as a component of purchase consideration (PC) under the requirements of ASC 805 and generally accepted accounting principles. “The turnaround was driven by stronger corporate and investor confidence, and aided by greater availability of debt financing with attractive terms,” says the report authors. “Companies also accumulated a record level of cash since the height of the financial crisis (2008-2009).”

In particular, the number of completed transactions increased by 54% from 2009 to 2010—as did the number of transactions (from 328 to 506) with sufficiently detailed disclosures regarding purchase consideration, including identifiable intangible asset fair values and goodwill. Approximately 19% of the studied transactions included earnouts, at a median fair value of $3.2 million and a mean of $18.7 million. Earnouts also represented 14% and 18% of purchase consideration when measured on the median and mean, respectively. In line with the study’s overall results, 10 of the 13 analyzed industries saw the number of completed transactions rise, with telecom, energy, aerospace & defense, and industrial posting the largest increases. Healthcare recorded the smallest percentage increase while the real estate and transportation sectors reported declines.

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