The headline says $12M. What is the earn-out worth?
An earn-out with a threshold and a cap is not worth its headline, and it is not worth the seller's forecast either. The payoff is nonlinear, so a single growth assumption gets it wrong in both directions. Simulate the EBITDA path through the payment formula and you get a present value you can book plus the odds it pays nothing at all.
Finance Advanced Monte Carlo Pro engine
After you install, this is the model to open.
What Is the Earn-Out Actually Worth?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
At the seller's 7% growth the sheet reads $4,268,803 nominal and $3,148,881 present value. Then 10,000 trials show what the growth range does to it.
- Mean present value
- $3.04M against a $12M headline
- Median present value
- $3.05M about a quarter of the headline
- P25 outcome
- $729K and the P10 is $0
- Chance it pays nothing
- 14% across all three years
The $12M headline is worth a mean of $3.04M today, about a quarter of it, because year one clears nothing at all until growth tops 8.3% and the cap chops the good years. The downside is the part that moves a negotiation: the P10 is $0, the P25 is only $729K, and there is roughly a 14% chance the earn-out pays nothing across all three years. Value it at the mean, not the maximum, and price the zero.
The model
The deal terms as signed, then a three-year grid. EBITDA grows, the excess over the threshold is multiplied, the result is trimmed to the annual cap, and each payment is discounted back.
| Base year EBITDA | $6,000,000 |
| Annual EBITDA growth rate | -3% - 7% - 16% (uncertain) |
| Threshold EBITDA | $6,500,000 |
| Payout multiple above the threshold | 3.5x |
| Annual cap on the payment | $4,000,000 (so $12M over 3 years) |
| Discount rate | 12% |
| Total present value of the earn-out | simulated |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
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- What does ignoring correlation cost you?
- Do your two holdings actually diversify each other?How Two Assets Move Together
- Will you run out of cash this quarter?Will the Cash Last Thirteen Weeks?
Every model like this one, and the method behind them: Monte Carlo simulation.