What are the risks and potential upside of the three‑year earnout component, and how might it influence the transaction's ultimate cost and integration timeline?

Risks & Upside of the Three‑Year Earnout

The earn‑out creates a variable “second‑half” of the $1.9 M consideration that will be paid only if the UK target meets predefined financial or operational milestones over the next 36 months. The primary risk is earn‑out shortfall: if post‑close synergies (e.g., cross‑selling of Interlink’s sensor platforms to the target’s OEM base) materialize slower than expected, or if the target’s cash‑flow generation stalls, the contingent payment could be reduced dramatically, leaving Interlink with a lower effective acquisition price but also a weaker revenue boost than modeled. Conversely, a strong upside occurs if the target exceeds its EBITDA or revenue targets, triggering the full earn‑out and delivering an additional $0.7‑$1.0 M of cash‑flow‑equivalent value. Because the target is a break‑even, $5 M revenue business, even modest margin improvements (e.g., integrating Interlink’s higher‑margin sensor modules) could push earnings well above the earn‑out thresholds, turning a modest cash outlay into a high‑return add‑on.

Impact on Transaction Cost & Integration Timeline

From a cost‑management standpoint, the earn‑out effectively spreads up to ~30‑50 % of the purchase price over three years, preserving cash at closing and reducing immediate dilution of Interlink’s balance sheet. However, the contingent nature of the payment adds execution risk: the parties will likely negotiate detailed performance metrics, reporting cadences, and governance rights that can prolong integration—especially if disputes arise over milestone calculations. A longer integration window (12‑18 months to align product roadmaps, consolidate supply chains, and harmonize ERP systems) may be required to satisfy earn‑out conditions, potentially delaying the realization of cost synergies and affecting near‑term earnings guidance.

Trading Implications

• Short‑term: The market may price the deal conservatively, reflecting the uncertainty around the earn‑out. Expect modest upward pressure on LINK if the LOI is confirmed, but volatility could spike on any news about due‑diligence findings or earn‑out structuring. Technicals: LINK is trading near its 50‑day moving average with a bullish flag pattern; a breakout above the recent high (~$12.30) could attract momentum buyers betting on successful integration.
• Medium‑term: If Interlink releases guidance indicating that the earn‑out targets are achievable (e.g., projected 10‑15 % margin uplift post‑integration), the stock could rally 8‑12 % as the implied upside to shareholders becomes clearer. Conversely, any indication of integration delays or a tightened earn‑out hurdle would likely pressure the price back toward the lower end of the $10‑$11 range.
• Actionable: Consider a small‑to‑moderate long position (e.g., 2–3 % of portfolio) with a stop just below the 50‑day SMA (~$10.80) to limit downside if due‑diligence uncovers red flags. Monitor upcoming corporate filings and earnings releases for explicit earn‑out language—those events are catalysts for price moves.