Key Learnings from 2025 Life Sciences M&A Trends in CLE

In the world of mergers and acquisitions (M&A), earnout structures continue to be a common practice. While earnouts can provide benefits and incentives for both buyers and sellers, they also present challenges that must be carefully navigated.

Earnouts are agreements where sellers receive additional payments based on the performance of the acquired business after the transaction. This can be a useful tool for bridging valuation gaps and aligning the interests of both parties. However, earnouts can also lead to conflicts if there are disagreements over the measurement of performance metrics or if the goals are unrealistic.

One of the main challenges of earnouts is the potential for disputes to arise between buyers and sellers. Achieving consensus on the terms of the earnout, including the performance metrics and targets, can be complex. Sellers may have concerns about the ability of the buyer to influence the performance of the acquired business or manipulate the results to avoid making additional payments.

In addition to potential disputes, earnouts can also create uncertainty for both parties. Sellers may be unsure of the value they will ultimately receive, while buyers may face challenges in integrating the acquired business and achieving the agreed-upon performance metrics. This uncertainty can lead to a lack of trust between the parties and hinder the success of the transaction.

Despite these challenges, earnouts are likely to remain prevalent in M&A transactions. They can be particularly useful in deals involving potential rivals, where the parties may have differing views on the future performance of the business. Earnouts allow the parties to share the risk and reward of the transaction, creating incentives for both sides to work together to achieve the desired outcomes.

To navigate the challenges of earnouts effectively, both buyers and sellers must engage in open and transparent communication throughout the negotiation process. Setting clear expectations and defining the performance metrics and targets in a detailed and comprehensive manner can help reduce the risk of disputes and uncertainties down the line.

In conclusion, while earnout structures can be a valuable tool in M&A transactions, they also present challenges that must be carefully managed. By understanding the potential pitfalls and taking proactive steps to address them, buyers and sellers can increase the likelihood of a successful transaction and achieve their desired outcomes.