Headline price is not the price
Inflation erodes deferred consideration
At 3% inflation, $4M paid in three years buys what about $3.66M buys today. The longer the deferral, the bigger the gap. Buyers know this, which is why deferred consideration is cheaper for them to offer than cash at close.
Probability matters more than inflation
The larger risk is not inflation but whether the earnout pays at all. Targets tied to metrics the buyer controls after close, such as integrated revenue or combined EBITDA, are the hardest to hit. Model the mechanics in detail with the earnout modelling tool.
Frequently asked questions
- How do I value an earnout in today’s dollars?
- Deflate the earnout by expected inflation for each year until it pays to get its real value. For a risk-adjusted value, multiply by your honest probability of hitting the targets and discount at a rate that reflects the risk of relying on the buyer.
- Is a higher headline price with an earnout better than more cash at close?
- Only if the risk-adjusted value is higher. A larger offer that is heavily weighted to an uncertain earnout is often worth less today than a smaller all-cash offer. Compare offers on risk-adjusted value, not headline price.