Structuring an Earn-out in a Website Sale
An earn-out is a clause or provision in a website purchase agreement which details future compensation to the website seller if the website achieves certain financial (such as sales or profits) or non-financial (such as number of new subscriptions) goals.
An earn-out is best suited for website transactions in which the website seller continues to be actively involved in the management of the website business. The seller receives an initial payment for the website from the buyer and can receive additional payments in the future if the website achieves certain predetermined targets.
An earn-out can enable the seller to receive a higher sale price for the website. For example, let’s say a buyer is willing to pay $100,000 for a website but the seller is adamant about receiving $150,000. An earn-out could be structured to make up the $50,000 difference. The extra $50,000 is received out of a percentage of future gross revenues. In this way, the seller receives his price and the buyer can defer the additional payment.
An earn-out could also be ideal in a scenario in which the website’s revenues are highly unpredictable. The earn-out can be structured so it is tied to future revenues. The buyer thus pays the earn-out only after the business has performed well in the future. This reduces the risk to the website buyer.
An earn-out is also a great tool for the buyer to motivate the seller in his involvement in the business. Having already received an initial down-payment for the website, a seller may feel less motivated to work as hard as before for the new owners. An earn-out provides a mechanism for the buyer to encourage the seller to continue to work hard with the website under new management.
Of course, an earn-out is only appropriate for a seller if the seller maintains active management and control of the website after the sale. In this way, he is rewarded for his hard work.
The earn-out agreement or earn-out clause in the website purchase agreement must detail all the terms and conditions agreed upon by both parties. This includes the specific results to measure (such as gross sales), how they will be measured (such as the accounting method to be used), what the compensation would be (such as a % of sales), and the term of the agreement (such as 3 years).
An earn-out is one of many agreements that a good website broker can structure for a website buyer and seller in order to close a website sale.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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