Module II· EV-Equity BridgeAdvanced
Question
How do you treat earn-outs and contingent consideration in the bridge?
Answer
Earn-out
a variable purchase-price component, dependent on post-closing performance (e.g. an EBITDA hurdle in Year 1–3). In a valuation from the buyer's perspective: treat the expected earn-out value like a debt-like item and deduct it from EV.
Formula
```
Earn-out bridge = maximum × hit probability × discount factor
```
Deep diveShow more details
Example — earn-out with hit probability
Inputs:
- Maximum earn-out on hitting the hurdle: $100m
- Hit probability: 60%
- Payout timing: 3 years
- WACC: 9%
Calculation:
```
Earn-out bridge = $100 × 60% × 1 / (1.09)^3
= $100 × 0.60 × 0.7722
= $46m (deduct from EV)
```
In practice
For non-DCF valuations, often a footnote, because the earn-out estimate is subjective.
Seller's perspective
an earn-out is an equity-value addition (future proceeds).
Pitch tip
'Expected earn-out $46m discounted − included as a bridge item from the buyer's perspective; the seller view treats it as an upside option.'