Abstract

Earn-outs are provisions in which the seller of a business receives additional future payments based on the achievement of certain future financial goals by the target. These provisions can effectively contribute to bridging the gap between buyer and seller and hence facilitate a transaction, especially in times of increased uncertainty regarding the future economic development of the business. This paper presents a model for valuing the contingent claim associated with earn-out clauses. The proposed model is based on option pricing theory, and its implementation is straightforward.