iGB North America magazine IGBNA Aug/Sep | Page 58

Business and Finance

THE CHANGING FACE
OF EARN-OUTS
Following the recent flurry of M&A activity, David Shapton of Akur Partners looks at how the iGaming
sector is changing how it structures and uses earn-outs.
Consolidation in the online gaming sector
is becoming increasingly prevalent. Not
only at the large, publicly quoted end but
also amongst mid-sized players, which are
more often owner-managed businesses and
therefore less likely to give shareholders an
entirely clean exit at deal completion.
Earn-out packages are almost unheard
of in acquisitions of public companies
(who typically have a diversified base of
passive shareholders) and are also rare for
private equity-owned businesses (where
the majority shareholder will not have a
managerial role post-deal).
But away from the speculation surrounding
Ladbrokes/GalaCoral and the bidders
circling bwin.party, the earn-out is more

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between buyer and seller, with the buyer
effectively saying: “if you think you’re
worth that much, you’ll have to prove it”;
To provide mitigation to the acquirer’s
acquisition risk;
To ensure the selling owner-managers
remain motivated even after taking
substantial funds off the table;
To give owner-managers both certainty
of an exit and the opportunity to further
maximise value; and/or
(Purely cosmetically) to create an external
perception that this is a bigger deal than
the reality (e.g. with a high % of maximum
deal value subject to unlikely performance
criteria), sometimes linked to sellers’ vanity
to demonstrate that their business was

“If the acquired management team is given
autonomy to achieve its earn-out targets, where
is their incentive to assist the buyer to integrate
the acquisition, achieve identified cost savings
and cross-sell products across the respective
customer bases?”
often than not a crucial structuring tool,
allowing advisers to craft a deal that marries
both parties’ expectations.
Earn-outs are employed for a variety of
reasons but the most common include:
• To bridge a valuation or forecast gap

really worth what they had claimed.
But earn-outs bring with them
complications. The simplest form is to pay
a multiple of profits in one or several future
time periods. However, this structure can
create incentives that work against the

58 | iGamingBusiness North America | Issue 20 | August/September 2015

enlarged business, encouraging exiting
managers to cut costs (e.g. marketing, tech
development etc.) in order to inflate the
bottom line and, in turn, their pay-out.
The acquirer’s second dilemma is to what
extent an earn-out structure stifles post-deal
integration, potentially jeopardising the
acquirer’s key rationale for the acquisition.
If the acquired management team is given
autonomy to achieve its earn-out targets,
where is their incentive to assist the buyer to
integrate the acquisition, achieve identified
cost savings and cross-sell products across
the respective customer bases?
Avoiding these pitfalls (on both sides)
comes down not only to the detailed wording
of the sale and purchase agreement but
also a mutual, softer understanding of how
the combined business should operate,
including appropriate incentives to integrate
and cross-sell. Getting these factors right
increases the chances of a significantly
value-enhancing (or, in the case of the seller,
value-crystallising) deal and lowers the risk
of a costly post-deal fall-out.
In any transaction where ownermanagers are seeking an exit, while many
in the industry may focus on the headline
deal value number, those closer to the
protagonists on both sides will have to
consider the construction and incentives
of an earn-out programme very carefully. It
may surprise some that this can often be the
trickiest area for negotiation.