Earnout Copyright 2003 by Robert F. Bruner.

This spreadsheet automates the valuation of a simple earnout structure using Monte Carlo Simulation. The exhibits given in the next two worksheet are identical to Exhibits 3 and 4 in Chapter 22, "Structuring and Valuing Contingent Payments in M&A," of Applied Mergers and Acquisitions by Robert F. Bruner. See Chapter 22 for further discussion of earnout valuation. Prepared by Scott Stiegler and Professor Robert F. Bruner of the Darden Graduate School of Business Administration, University of Virginia, http://faculty.darden.edu/brunerb/. Please note: 1) This spreadsheet should be opened using Crystal Ball add-in simulation software. 2) This is a working model. Assumptions / Inputs presented can be changed to vary the results. 3) As long as default spreadsheet calculation is "expected value" the impact of changing assumptions will be computed in real time. If calculation is set as "monte carlo" you should press the F9 function key to recalculate results, and run a simulation to obtain a distribution of the results.
This software was prepared solely for non-commercial educational purposes as a supplement to the book, Applied Mergers and Acquisitions , by Robert F. Bruner. While it has been reviewed with care, and to the best of the author's knowledge performs as described in the book, the publisher and author do not represent that this software is error-free, and cannot be accountable for errors or omissions, nor for any liability arising from uses of this software. ALL WARRANTIES, EXPRESS AND IMPLIED, INCLUDING THE WARRANTY OF MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED. NEITHER THE AUTHOR OR PUBLISHER SHALL BE LIABLE OR RESPONSIBLE FOR ANY LOSS, INJURY, CLAIM, LIABILITY, DAMAGE OR EXPENSE OF ANY KIND OR NATURE CAUSED BY OR ARISING IN CONNECTION WITH THE USE OF THIS SOFTWARE, INCLUDING BUT NOT LIMITED TO DEFECTS IN THE MEDIUM, OR ERRORS, OMISSIONS, OR INACCURACIES IN THE DATA PRODUCED BY THIS SOFTWARE. IF FOR ANY REASON, BY OPERATION OF LAW OR OTHERWISE, ANY PORTION OF THE FOREGOING LIMITATION OF LIABILITY SHALL BE VOID OR OTHERWISE UNENFORCEABLE, THEN, IN SUCH EVENT, THE MAXIMUM LIABILITY OF THE PUBLISHER OR AUTHOR, IF ANY, SHALL BE NOT EXCEED THE TOTAL AMOUNT ACTUALLY PAID TO THE PUBLISHER BY THE USER FOR THE SOFTWARE. This software is intended for use as an educational tool, and not as a substitute for legal, financial or other professional or expert advice. Use by the reader of this software constitutes assent to the terms of use and disclaimer of liability.

Copyright 2003 by Robert F. Bruner. All rights reserved. Use is subject to the terms and conditions given on the "Intro" page.

Exhibit 3 Buyer (XYZ) Valuation

Base Year Sales Earnout Period, in Years Sales Growth Rate min most likely max

$ 10,000 5

Year 1 #NAME?

Year 2 #NAME? #NAME?

Year 3 #NAME? #NAME?

Year 4 #NAME? #NAME?

Year 5 #NAME? #NAME?

0% 5% 10%

#NAME?

Operating Income Profit Margin min most likely max 0% 5% 10%

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

Earnout Target Annual Earnout Value Present Value of the Earnout, Discounted at 5% Dollars at Closing Valuation of Proposed Total Payment

$ 250 #NAME?

$ 500 #NAME?

$ 750 #NAME?

$ 1,000 #NAME?

$ 1,250 #NAME?

#NAME? $ 2,000

#NAME?

Note: This exhibit shows the results of one draw of the simulation. Each time the model is opened, it recalculates, producing different numbers from those appearing in Exhibit 3 of Chapter 22. Please allow for this in comparing the results of this table with Exhibit 3.

Distribution for Enterprise Valuation of Proposed Earnout

0.12
Minimum $ Mean $ Maximum $ 2,000 2,414 3,316 Note: The minimum, mean, and maximum are based on a simulation of 100 draws. Repeating this simulation, especially with more draws will likely produce slightly different estimates. With a very large number of draws, the estimates should be reasonably consistent from simulation to

PROBABILITY

0.1 0.08 0.06 0.04 0.02 0

$2 ,0 00 $2 ,1 32 $2 ,2 63 $2 ,3 95 $2 ,5 26 $2 ,6 58 $2 ,7 90 $2 ,9 21 $3 ,0 53 $3 ,1 85

Base Year Sales Earnout Period, in Years Sales Growth Rate min most likely max

$ 10,000 5

Year 1 #NAME?

Year 2 #NAME? #NAME?

Year 3 #NAME? #NAME?

Year 4 #NAME? #NAME?

Year 5 #NAME? #NAME?

10% 15% 20%

#NAME?

Operating Income Profit Margin min most likely max 5% 10% 15%

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

#NAME? #NAME?

Earnout Target Annual Earnout Value Present Value of the Earnout, Discounted at 5% Dollars at Closing Valuation of Proposed Total Payment

$ 250 #NAME?

$ 500 #NAME?

$ 750 #NAME?

$ 1,000 #NAME?

$ 1,250 #NAME?

#NAME? $ 2,000

#NAME?

Note: This exhibit shows the results of one draw of the simulation. Each time the model is opened, it recalculates, producing different numbers from those appearing in Exhibit 4 of Chapter 22. Please allow for this in comparing the results of this table with Exhibit 4.

Distribution for Enterprise Valuation of Proposed Earnout

0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
Minimum Mean Maximum $ $ $ 2,892 5,484 7,606

PROBABILITY

$2 ,8 92 $3 ,3 63 $3 ,8 35 $4 ,3 06 $4 ,7 77 $5 ,2 49 $5 ,7 20 $6 ,1 92 $6 ,6 63 $7 ,1 35