An endorsement for earnouts

by Catherine Woods - Tuesday, 6th November 2007 -

NCC Group doesn’t do acquisitions without an earnout in place. FD Paul Edwards explains why he has no qualms about this sometimes-controversial deal structure.

Edwards says earnouts have worked very well for the IT company although admits that the structure sometimes prevents the management of the acquired business thinking long-term.

“The management has one eye on cost, profitability and the bottom line all the time and that can detract from long-term investment.

“We’ve been good at managing that aspect of an earnout. Where we want to invest in the business – whether it’s in people or assets – we sit down with management and ring fence those costs and keep them outside the terms of the earnout.”

He says it’s sometimes helpful to collapse the earnout early. “That takes away the one eye on the bottom line all the time that the management has.”

Edwards adds: “Don’t tell the management about the potential to collapse the earnout. But they will also recognise that if you’re forecast to make a million pounds on profit and then after six months you’re at £800,000, it’s in everybody’s interest to get the earnout out of the way and off the table.”

He also has advice for those on the other side of the table. “Don’t be afraid of it because if you’re confident in your forecast and you’re confident in your ability to run the business, you should have no qualms.”

Picture source

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