Earnouts, a performance-based consideration used in some M&A transactions to bridge the value gap between seller and buyer expectations, have become increasingly popular. Though hard to quantify because of confidentiality, earnouts are found in nearly 30 percent of M&A transactions, according to the American Bar Association, and are more frequently used in deals with values under $250 million.

Earnouts can align buyer and seller interests, incentivizing sellers to stick around post-sale to realize an economic benefit from the continued success of the business. Increasingly, they're being used to align total deal value to the ongoing performance of the business in a period of uncertainty. This method helped buyers during the pandemic address concerns about short-term uncertainty and inconsistencies in business performance attributed to COVID-19. Now, with the looming threat of a recession, retaining key management and owners is increasingly critical, so buyers are leveraging earnouts to drive sellers to remain active and help steady the business through volatile market conditions.

While earnouts can be a useful tool in M&A transactions, they can also be complex and challenging to negotiate and implement. They involve setting clear performance targets and establishing mechanisms for measuring and tracking the company's performance. Still, given today’s challenging economic environment, earnouts will likely remain an important feature in M&A deals.

M&A Market Activity

National deal volume slowed in December 2022, as increasing economic headwinds impacted M&A activity. U.S. M&A deal volume for the month of December 2022 (45.8 percent) was lower than December 2021, while total deal volume for 2022 (21.9 percent) was lower than in 2021.

The Greater Pittsburgh M&A market realized a sharp decline during 2022, as the Pittsburgh area’s deal volume (23.7 percent) was lower than the prior year. However, several noteworthy transactions occurred in the Greater Pittsburgh region during December 2022, both from strategic and private equity acquirers. VersiTech Inc., and Wolfe LLC completed strategic acquisitions within the month. In addition, Continuim Equity Partners completed an acquisition of Centric Machining Solutions LLC (dba Cutting Edge Machining Solutions), a CNC manufacturer of parts and equipment.

Deal of the Month

FNB Corporation (NYSE: FNB) acquired UB Bancorp, a bank holding company for Union Bank that provides commercial and retail banking services, headquartered in Greenville, North Carolina. In addition to offering retail banking services, UB Bancorp offers personal, mortgage and business loans. The company primarily operates in North Carolina, which will allow F.N.B. Corporation, a provider of financial services, to strengthen its footprint within the state. This is F.N.B. Corporation’s second strategic acquisition in 2022.

Carter Hatina is an Analyst with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email [email protected].