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Applying Lean Analytics to Performance Metrics in M&A Earnouts

Areskoug, Rasmus LU (2018) INTM01 20181
Innovation Engineering
Abstract
Ever since the dawn of internet, a new wave of fast-growing software companies has
emerged. The M&A scholars have struggled to find appropriate valuation mechanisms
for unprofitable companies with ultra-high revenue growth. To overcome the uncertain
future, a contractual provision called earnout is often used. An earnout is a contractual
provision in a M&A-deal that states the seller of the business is to obtain additional
compensation in the future if the business achieves certain metrics.
The purpose of this study is to contribute to practice and nascent literature by exploring
and evaluating metrics for SaaS-companies that can be used in earnouts. The study applies
Lean Anaslytics to suggest a framework for choosing what metrics... (More)
Ever since the dawn of internet, a new wave of fast-growing software companies has
emerged. The M&A scholars have struggled to find appropriate valuation mechanisms
for unprofitable companies with ultra-high revenue growth. To overcome the uncertain
future, a contractual provision called earnout is often used. An earnout is a contractual
provision in a M&A-deal that states the seller of the business is to obtain additional
compensation in the future if the business achieves certain metrics.
The purpose of this study is to contribute to practice and nascent literature by exploring
and evaluating metrics for SaaS-companies that can be used in earnouts. The study applies
Lean Anaslytics to suggest a framework for choosing what metrics to use, and discusses
how to avoid sub-optimisation and metric manipulation.
In order to answer the research questions, a qualitative, exploratory and abductive methodology
was used. The study combines a literature and thought leader review and interviews
to explore certain areas, with a case study that applies the findings.
The study suggests that the process for determining metrics should start with the buyer’s
acquisitions strategy. For acquisitions where the objective is to access talent, technology
or accelerate product road-map, the study has shown that earnouts in most cases not be
used at all. If the acquisition is made based on financial objectives, Lean Analytics can
be used to determine what stage the seller’s company is in. Understanding what stage
the company is in is crucial as the type of metrics that matter differ depending on stage.
The study suggests that the most suitable earnout metric for M&A based on financial
objectives is monthly recurring revenue (MRR). The metric must be clearly defined so it
cannot be manipulated. The reason why many other metrics from Lean Analytics cannot
be used is that they are vulnerable to manipulation and can restrict the operating freedom
for the entrepreneur. (Less)
Please use this url to cite or link to this publication:
author
Areskoug, Rasmus LU
supervisor
organization
course
INTM01 20181
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
8957185
date added to LUP
2018-08-29 08:56:42
date last changed
2018-08-29 08:56:42
@misc{8957185,
  abstract     = {{Ever since the dawn of internet, a new wave of fast-growing software companies has
emerged. The M&A scholars have struggled to find appropriate valuation mechanisms
for unprofitable companies with ultra-high revenue growth. To overcome the uncertain
future, a contractual provision called earnout is often used. An earnout is a contractual
provision in a M&A-deal that states the seller of the business is to obtain additional
compensation in the future if the business achieves certain metrics.
The purpose of this study is to contribute to practice and nascent literature by exploring
and evaluating metrics for SaaS-companies that can be used in earnouts. The study applies
Lean Anaslytics to suggest a framework for choosing what metrics to use, and discusses
how to avoid sub-optimisation and metric manipulation.
In order to answer the research questions, a qualitative, exploratory and abductive methodology
was used. The study combines a literature and thought leader review and interviews
to explore certain areas, with a case study that applies the findings.
The study suggests that the process for determining metrics should start with the buyer’s
acquisitions strategy. For acquisitions where the objective is to access talent, technology
or accelerate product road-map, the study has shown that earnouts in most cases not be
used at all. If the acquisition is made based on financial objectives, Lean Analytics can
be used to determine what stage the seller’s company is in. Understanding what stage
the company is in is crucial as the type of metrics that matter differ depending on stage.
The study suggests that the most suitable earnout metric for M&A based on financial
objectives is monthly recurring revenue (MRR). The metric must be clearly defined so it
cannot be manipulated. The reason why many other metrics from Lean Analytics cannot
be used is that they are vulnerable to manipulation and can restrict the operating freedom
for the entrepreneur.}},
  author       = {{Areskoug, Rasmus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Applying Lean Analytics to Performance Metrics in M&A Earnouts}},
  year         = {{2018}},
}