By Paul B. Finch, MBA & Susan W. Finch, MS, MBA | 1/28/2024

Corporate Merger and Acquisition activity has slumped to the lowest levels in a decade as buyers and sellers find it difficult to agree on acquisition pricing. For the first three quarters of 2023, merger and acquisition activity globally dropped in volume by 29% and, correspondingly, dropped in total value by 15% as compared to the same period one year earlier (Source: Dealogic).

Sellers point to hot equity markets to support their reasoning behind higher asking prices whereas buyers have remained cautious based primarily on the reality of greater transitional risk resultant from relatively high interest rates and associated increases in financing costs.

That said, motivated buyers and sellers are finding workarounds to fill the gap between seller valuations and what buyers are willing to pay. Specifically, buyers and sellers are finding ways to reduce transactional risk, and get deals done, by including Earnouts and Equity Rollovers into transaction terms and conditions. Earnout and Equity Rollover provisions were factors in nearly one-third of all private company transactions during the first three quarters of 2023, up 21% from the same period one year earlier (Source: SRS Acquiom).

Earnouts, as the name implies, are mechanisms which allow for a portion of the transaction price to be paid-out contingent on future performance whereas Equity Rollovers require a seller to take equity in the acquiring firm, as partial consideration of the purchase price, instead of cash.

With the Federal Reserve Board in no hurry to reduce interest rates at the present time, it appears likely that financing costs will remain high in the near term and, accordingly, uncomfortably high transactional risks for many buyers. As such, we expect Earnouts and Equity Rollovers to remain important factors in dealmaking for a while.

In our own Merger and Acquisition practice through Benchmark Solutions, we have increasingly used Earnouts and/or Equity Rollovers successfully as a means to reduce transactional risk for buyers while largely preserving sellers’ asking prices, providing a win-win scenario for both parties.

Benchmark Solutions, Inc. is a boutique business advisory whose Strategic Financial Advisors are subject matter experts in Financial Planning and Analysis, Business Valuation, Capital Acquisition, and Merger and Acquisition Advisory. We provide services to some of the most innovative, creative, existing and emerging companies in the agriculture, beverage, healthcare, and hospitality industries.

Paul B. Finch, MBA, is co-founder and Executive Director for Benchmark Solutions, Inc. and is an accomplished Strategic Financial Advisor. Professionally, Paul has focused his career on the various facets of corporate finance that revolve around the creation and measurement of equity value for his clients. Paul’s work includes both domestic and international merger and acquisition engagements as well as projects specifically designed for the purpose of increasing profitability, earnings quality, and growth prospects (while limiting risks and exposures) for his clients. Paul is a recognized subject matter expert in Financial Analysis, Financial Planning, Capital Acquisition, and Business Valuation and has published many articles pertaining to these topics. You can contact Paul at paul.finch@benchmarksolutions.us.com

Susan Finch, MS, MBA, is co-founder and Executive Director for Benchmark Solutions, Inc. and is an Economist. Susan has focused her career on the various facets of corporate finance that revolve around historical, current and predictive views of business operations for clients in order to assess potential returns on investment in Merger and Acquisition transactions as well as for Strategic Financial Planning. As an economist, Susan has expertise in Financial Analysis, Financial and Economic Modeling, Financial Planning and Financial Decision Making. Susan also has considerable experience in Econometrics for the purpose of understanding forward-looking estimates of economic growth, demand, and inflation and their potential impact on earnings quality. You can contact Susan at susan.finch@benchmarksolutions.us.com

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