There has been a remarkable change in the metrics used to calculate earnout payments in recent years. According to analysis of the Goodwin Private Equity Deals Database, there’s a shift towards the use of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a crucial determinant. The analysis indicates that EBITDA became almost as prevalent as revenue metrics for determining these payments, showing a significant increase of 22% in its usage from 2020 to 2022.
In the year 2022, EBITDA was used in 40% of earnouts, a substantial rise from its earlier usage. This trend underscores the increasingly diversified set of metrics that organizations are adopting to measure the financial worth and performance of their businesses, especially concerning payment structures like earnouts.
It’s worth noting that the widespread adoption of EBITDA bases the calculation of earnouts on concrete financial metrics rather than more volatile parameters such as revenue. It gives a more comprehensive view of a company’s operational performance as it takes into account not just the revenue but also the operational costs excluding the tax liabilities, interest payments, and non-cash charges like depreciation and amortization.
Attorneys, corporate counsel, and finance professionals are encouraged to familiarize themselves with these evolving trends. Understanding the shift towards EBITDA could be of great utility in shaping successful acquisition strategies and structuring comprehensive earnout agreements.
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