What’s an earnout, and why does Ryan Reynolds have one?
Pop culture aficionados recently got a taste of the Mergers and Acquisitions world when Aviation Gin LLC – the gin startup owned in part by famous film star Ryan Reynolds – was sold to Diageo, the world’s largest spirits company.
The source of the deal structure was Reynolds himself, who changed his out-of-office email to read as follows:
"Thanks for your email. I am currently out of the office but will still be very hard at work selling Aviation Gin. For quite a long time, it seems.
In related news, I just learned what an ‘earn out’ is... And I'd like to take this opportunity to apologize to everyone I told to go f**k themselves in the last 24 hours. My lawyers just explained how long it takes to achieve an 'earn out'... so... turns out I'm not as George Clooney as I thought. The point is, to those listed below, I'm sorry... and I'll indeed be needing your help in the coming months and years. Thanks in advance!
Mom, Blake, Peter, Diageo CEO, The Rock, George Clooney, Southern Glazer's, Betty White, TGI Friday's, Baxter, Calisthenics, AMC Theaters, Total Wine, The Number 8, Don Saladino, Darden, The Head of Alfredo Garcia, Soothing Lavender Eye Pillows."
For those of us in the industry, this offers an inside look at deal structure that we don’t normally get to see. The total potential price for Aviation Gin was $610 million, consisting of an initial $335 million up-front payment, with additional earnout potential of up to $275 million, based on the company’s sales over the course of the next ten years. So although Aviation is under new ownership, the buyer required further participation from Reynolds & Co to secure its performance for the next decade.
Diaego, the acquiring entity, knew that Reynolds’ name recognition helped Aviation Gin to drive sales, and considered that as part of the package when purchasing the business.
Whether your company is worth $610m or $610,000, earnouts are common when the success of the business is tied to the owner, and the owner’s connection with clientele. The good news is that within transactions completed by The Firm Advisors, a significant portion of the purchase price is paid to the current owner up front, and an earnout with the businesses we represent will typically be paid out within 1-3 years, depending on the owner’s flexibility and the perceived impact of the sale. This can also help "bridge the gap" when it comes to valuation of businesses that foresee an increase in revenues or profitability due to new services or improved processes.
Is an earnout the right structure for your deal?
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