’Many buyers didn’t put caps on their earnouts,’ says consultant

Brokers that inked merger and acquisition (M&A) deals in 2020 and 2021 could face a “great test” next year.

That was according to an acquisition consultant attending Insurance Times’ Broker CEO Forum last month (November 2023), who described 2024 as “the year of the earnout”.

Addressing broker chief executives and managing directors attending the exclusive event, held on 16 and 17 November 2023 at Lainston House in Winchester, the consultant explained that “2024 will be the great test” for acquisitive brokers “because there is a tsunami [of M&A deals] coming in 2024”.

He continued: “[In] 2021, there were [around] 140 deals in the UK [and] there were over 1,000 in the US.

“[Due to] the threat of increased taxes, the entire world gorged themselves on M&A. 2024 is the year of the earnout, coinciding with a hard market.”

An earnout is a contract that enables the seller of a business to receive future earnings from the sold company if it achieves predetermined financial goals.

‘Difficult time’ ahead

Where this previous influx of M&A and agreed earnouts becomes problematic, however, is because “many buyers didn’t put caps on their earnouts”, the consultant said.

“[Businesses are] going to have a very difficult time funding those earnouts, with many having to go back into fundraising. That could really pinch folks hard in 2024,” he added.

As a result, he felt “2024 could [see] a pretty dramatic slowdown [of broking M&A] as buyers allocate capital from what would be acquisitions to funding earnouts from 2020 [and] 2021”.