Rick Blumen, co-leader of the firm’s Finance Group, was quoted in Forbes and Mergermarket regarding his recent paper discussing earnout provisions – a tool that allows sellers to receive additional purchase price payments following the closing for hitting financial or other goals, while providing buyers a means to mitigate uncertainty in the valuation of a business; however, according to Blumen, these useful tools are not always getting proper accounting treatment in financing documents.
Blumen said where some lenders miss the mark is in the treatment of such non-cash EBITDA adjustments for purposes of calculating debt covenants. By not excluding these non-cash items, leverage ratios can be distorted in a counterintuitive way.
“The exclusion of earnouts from total debt started out as an exception to the rule, but has become the norm among lenders to private equity,” Blumen explained.
Read Blumen’s full article titled “Accounting for Earnouts under Financing Agreements.”