The most highly negotiated provision of most transactions is price. Sellers want to maximize the value of the deal, putting the most optimistic spin historical and forward-looking projections. Sellers take a more skeptical view, questioning the sustainability of growth and the accuracy of forecasts.
When differences over valuation cannot be bridged, the parties may use an earnout, which allows them to both take a wait-and-see approach and still close the transaction.
Earnouts generally involve a current payment from buyer to seller together with ongoing payments to the seller if the company performs as the seller projected. But there are many drafting and operational traps when using earnouts.
This program provides a practical guide to structuring and drafting earnouts to later disputes and litigation.
- Most highly negotiated and litigated provisions in earnout agreements
- Post-closing operations – control by buyer, but informational access to seller
- Defining key metrics – objective, measurable and potential traps
- Relationship of earnouts to senior debt and other preferential returns
- Debt issues and how it impacts financial results – and post-closing payments
- How earnouts are different than escrow and holdbacks