Case 071Exits and secondariesHard

Mapvik Geospatial is selling for a Rs 900 crore headline, but only Rs 630 crore arrives at closing. What do the founders realistically receive, and how should they value the earn-out?

The situation

Mapvik Geospatial, a mapping-data company, has agreed to sell to a listed engineering group for Rs 900 crore. Rs 630 crore is paid in cash at closing. Rs 90 crore sits in escrow for 18 months against warranty claims. The remaining Rs 180 crore is an earn-out, paid in full if Mapvik's revenue reaches Rs 250 crore in the second year after closing, and not at all otherwise. Mapvik's own plan for that year is Rs 210 crore.

Investors hold Rs 150 crore of 1x non-participating preference shares, which convert into 35% of the company. The founders hold the other 65%. Use an illustrative 12% a year as the rate for money the buyer still owes.

Your task

What do the founders realistically receive, in rupees and in timing, and how should they put a value on the earn-out before they sign?

Quick check

The earn-out pays Rs 180 crore if revenue reaches Rs 250 crore. What is a sensible value for it today?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The Rs 900 crore headline is worth about Rs 742 crore today: Rs 630 crore at closing, Rs 90 crore of escrow worth Rs 76 crore after the wait, and an earn-out worth about Rs 36 crore at 25% odds. The investors convert, because 35% of the upfront alone is Rs 220.5 crore against a Rs 150 crore preference, so the founders take 65% of each payment: Rs 409.5 crore at closing, Rs 58.5 crore if the escrow is clean, and a 25% chance of Rs 117 crore, about Rs 482 crore in today's money.

Step 1Why is the headline not the price?

Selling a house for Rs 1 crore where Rs 70 lakh is paid now, Rs 10 lakh is held back until the roof survives one monsoon and Rs 20 lakh is paid only if the local metro station opens on time is not a Rs 1 crore sale. A sale price with escrow and an earn-out is three different claims with three different odds, and only the upfront is a sale. Mapvik's Rs 630 crore is certain at closing. The Rs 90 crore escrow is likely but late. The Rs 180 crore earn-outA part of the price that is paid only if the sold business hits an agreed target after closing, usually revenue or profit over one to three years. depends on beating the company's own plan by 19% while the buyer, not the founders, runs the business.

Step 2How do you value the escrow and the earn-out?

The escrow is a timing question. If no warranty claim lands, Rs 90 crore arrives in 18 months; at an illustrative 12%, that is worth Rs 75.9 crore today. The earn-out is an odds question: it pays all or nothing on a revenue number 19% above plan, so give it a probability and discount the expected payment. Set out three outcomes for second-year revenue: Rs 255 crore with a 25% chance, Rs 220 crore with 30% and Rs 190 crore with 45%, an expected Rs 215 crore, close to the Rs 210 crore plan. Only the first outcome pays, so the earn-out is worth Rs 180 crore times 0.25, Rs 45 crore, or Rs 35.9 crore today. The headline becomes Rs 741.8 crore.

The relationship
Value today=630+901.121.5+180×0.251.122=630+75.9+35.9≈742\text{Value today} = 630 + \frac{90}{1.12^{1.5}} + \frac{180 \times 0.25}{1.12^{2}} = 630 + 75.9 + 35.9 \approx 742
630cash paid at closing, Rs crore
90 / 1.12^1.5the escrow, discounted for 18 months at an illustrative 12%
180 x 0.25the earn-out times the assumed 25% chance of reaching Rs 250 crore
What it says in wordsAdd the certain cash to the discounted escrow and the probability-weighted, discounted earn-out, and the Rs 900 crore headline is worth about Rs 742 crore today.
Mapvik's sale: the Rs 900 crore headline and what it is worth today, Rs crore0300600900HeadlineUpfront 630Earn-out 180Escrow 90900RealisticUpfront 630Gap 158Escrow 76Earn-out 36742The Rs 158 crore gap is a 25% chance of beating plan by 19%, plus 18 to 24 months of waiting at an illustrative 12%Earn-out: Rs 180 crore x 0.25 = Rs 45 crore expected, worth Rs 36 crore todayEscrow: Rs 90 crore in 18 months is worth Rs 76 crore today
The Rs 900 crore headline is Rs 630 crore of cash, Rs 90 crore of escrow and a Rs 180 crore earn-out, but valued today at 12% and 25% odds the same deal is worth about Rs 742 crore, a gap of Rs 158 crore that is almost entirely the earn-out.
Step 3What do the founders get after the preference?

Check whether the investors take their preference or convert. Converting gives them 35% of the Rs 630 crore upfront, Rs 220.5 crore, already more than the Rs 150 crore preference, so they convert and every later payment is also split 65:35. The founders receive Rs 409.5 crore at closing, Rs 58.5 crore when the escrow releases and Rs 117 crore if the earn-out pays: Rs 585 crore on the headline, about Rs 482 crore in today's money. The preference would only matter if the upfront fell below Rs 429 crore; at Rs 400 crore, for instance, the investors would take Rs 150 crore rather than Rs 140 crore and the founders would get Rs 250 crore, 62.5% rather than 65%.

Rs croreHeadlineFounders' 65%Founders, today's value
Upfront cash630.0409.5409.5
Escrow, 18 months90.058.549.4
Earn-out, 25% odds, 2 years180.0117.023.3
Total900.0585.0482.2
The founders' Rs 585 crore share of the headline is Rs 482 crore in today's money, with Rs 409.5 crore of it certain at closing and the Rs 117 crore earn-out share worth only Rs 23.3 crore once its odds and timing are counted.
From Rs 900 crore to the founders' Rs 482 crore: who takes what, Rs crore300600900900Headline-315Investors' 35%585Founders' headline-9.1Escrow wait-94Earn-out odds482Founders todayInvestors convert: 35% of the Rs 630 crore upfront is Rs 220.5 crore, more than their Rs 150 crore preferenceThe preference would only bite if the upfront fell below Rs 429 crore
Of the Rs 900 crore headline, the investors' 35% takes Rs 315 crore, the escrow wait costs the founders Rs 9.1 crore and the earn-out's odds and timing cost them Rs 93.7 crore, leaving about Rs 482 crore of value today against Rs 585 crore on paper.
Step 4What should the founders ask for before signing?

The all-or-nothing hurdle is the problem: Rs 249 crore of revenue pays nothing. A sliding scale, nothing at Rs 200 crore and the full Rs 180 crore at Rs 250 crore, would be worth about Rs 66.6 crore on the same three outcomes, against Rs 45 crore for the binary version. The near-plan outcome at Rs 220 crore would pay Rs 72 crore instead of zero. They should also ask who controls pricing, hiring and the sales budget after closing, because an earn-out run by the buyer measures the buyer's choices; and whether revenue counts Mapvik's products sold through the buyer's channels. If the odds of the hurdle were 50% rather than 25%, the deal would be worth Rs 778 crore today; the founders' negotiation is about moving those odds into the contract rather than hoping for them. The limitation of this whole exercise is that the three outcomes and the 12% rate are assumptions, and a buyer will assume different ones.

Where candidates lose it

The common miss is dividing Rs 900 crore by ownership and announcing that the founders receive Rs 585 crore. A third of the headline is late or conditional, and the conditional part needs a probability before it has a value.

The second is forgetting to test the preference. Here the investors convert because 35% of the upfront alone beats Rs 150 crore, but a candidate who says 65% without checking has guessed; at a Rs 400 crore upfront the answer would have been different.

What the interviewer asks next

  • The buyer offers Rs 700 crore all in cash at closing instead. Should the founders take it?
  • How would you check whether 25% is the right probability for the earn-out?
  • The escrow is extended to 36 months and raised to Rs 150 crore. What does that cost the sellers?

Company names and figures are illustrative.