Jonathan Jay with Lawyer John Andrews — Part 2
Welcome to the second part of a two-part Dealmakers video in which acquisitions expert Jonathan Jay speaks with lawyer John Andrews. In this segment, John simplifies the concept of an earn-out — a critical aspect of structuring a business acquisition deal.
John explains how earn-outs can be based on business performance or individual performance, emphasising the potential risks and benefits. He addresses common concerns like the timing of setting up a limited company and the importance of well-crafted articles and a shareholders' agreement.
The conversation also covers the recommended approach for negotiating commercial terms directly with the seller while involving lawyers for warranties, indemnities, and security. John provides insight into the division of work between lawyers and accountants — from company setup and due diligence to drafting legal documents and reviewing financial figures. He also offers tips for tailoring the due diligence process to save on legal fees while ensuring a thorough assessment.
A simple breakdown of how earn-outs work in a business acquisition
Linked to business performance metrics — revenue, profit, or EBITDA targets. The seller earns additional payments when the business hits agreed milestones post-acquisition. This aligns incentives and reduces upfront risk for the buyer.
Linked to the seller's personal involvement — staying on for a transition period, hitting handover targets, or retaining key clients. Ensures the seller remains committed to a smooth transfer of the business.
"An earn-out bridges the valuation gap — the seller gets their price if the business performs, and the buyer only pays when it does."
— John Andrews, M&A Lawyer
Clear division of responsibilities during an acquisition — and how to save on legal fees
Fee-saving tip: Tailor your due diligence to fit your specific deal. You can take on parts of the process yourself to reduce legal costs — just ensure the critical elements get professional review.
