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Josh Harris's Commanders deal contains 'earnout' payment to Daniel Snyder
I am a corporate lawyer with an accounting background. I do a good deal of mergers and acquisitions work including earnouts. An earnout is a type of contingent purchase price that is based on the earnings of the acquired company. There are some fun accounting issues involved in these deals.
I was amused to see the sale of the Washington professional football team involves an earnout which is something that the NFL is not used to.
Link to tweet
https://www.washingtonpost.com/sports/2023/05/17/josh-harris-deal-earnout-commanders/?utm_campaign=wp_main&utm_medium=social&utm_source=twitter
Josh Harris’s $6.05 billion deal to purchase the Washington Commanders from Daniel Snyder includes an “earnout,” a structure that would provide Snyder with a deferred payment of an amount contingent on the franchise reaching specified financial benchmarks, according to five people with knowledge of the terms of the sale.
The earnout represents a relatively small but perhaps meaningful portion of the overall sale price. Its inclusion in the deal explains, in part, why people familiar with the deliberations of the NFL finance committee last week described the sale agreement between Harris and Snyder as unusually complex.....
The earnout may have been used as a mechanism during the negotiations to push the sale price above Snyder’s $6 billion target after Harris’s group was unwilling to bid that much. One person with knowledge of the process said the payout could be as much as approximately $200 million, though the Harris group could end up paying much less. The exact business-related benchmarks on which the amount of the payment are based were not immediately clear. The inexact nature the payment amount also signals that the $6.05 billion sale price might not be fixed.....
A member of the Rivkin Radler law firm, writing last year on the legal website JD Supra, described an earnout as “a form of contingent, deferred consideration that is often utilized to reconcile a difference of opinions between the buyer and the seller regarding the fair market value of the target business as of the date of the closing.”
Multiple sports financial advisers said such a structure would be common and well-accepted in most business settings in a deal of such magnitude but is extremely rare in sports-franchise sales. The NFL has a highly restrictive set of rules related to franchise sales, and the league generally prefers to deal with a lead owner in a prospective ownership group with overwhelming wealth and access to cash.
The earnout represents a relatively small but perhaps meaningful portion of the overall sale price. Its inclusion in the deal explains, in part, why people familiar with the deliberations of the NFL finance committee last week described the sale agreement between Harris and Snyder as unusually complex.....
The earnout may have been used as a mechanism during the negotiations to push the sale price above Snyder’s $6 billion target after Harris’s group was unwilling to bid that much. One person with knowledge of the process said the payout could be as much as approximately $200 million, though the Harris group could end up paying much less. The exact business-related benchmarks on which the amount of the payment are based were not immediately clear. The inexact nature the payment amount also signals that the $6.05 billion sale price might not be fixed.....
A member of the Rivkin Radler law firm, writing last year on the legal website JD Supra, described an earnout as “a form of contingent, deferred consideration that is often utilized to reconcile a difference of opinions between the buyer and the seller regarding the fair market value of the target business as of the date of the closing.”
Multiple sports financial advisers said such a structure would be common and well-accepted in most business settings in a deal of such magnitude but is extremely rare in sports-franchise sales. The NFL has a highly restrictive set of rules related to franchise sales, and the league generally prefers to deal with a lead owner in a prospective ownership group with overwhelming wealth and access to cash.
The Washington Commander deal appears to be over leveraged by NFL standards and the earnout may help by moving some of the "debt" to hopefully being classified as "off-balance sheet" which would help the debt ratios. This will be amusing to watch.