Earnouts can be used to address a perception of risk faced by a buyer. They also are used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing to pay.
In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.
Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur:
- Buyer breach of post-closing covenants
- Termination of key employees
- Sale of the company or a substantial reduction in assets
These provisions are designed to protect the seller from changes that would hurt the company/buyer’s ability to meet their earnout targets.
Contact us to learn more about deal structures and how we protect your interests in a sale.