Smart Contract Applications in M&A: Earn-outs

This blog has previously provided an overview of how blockchain technology and smart contracts might be adapted to the legal industry. In this post, we will explore the specific example of how these technologies may be able to simplify an earn-out agreement in an M&A transaction.

What are earn-outs?

In an earn-out, the seller of a business receives additional compensation after closing if the business meets certain financial goals. To put it simply, an earn-out is a series of "if-then" statements that determine how much the seller is paid based on different factors.

How smart contracts may help

Inherent in the traditional earn-out contract is a significant counter-party risk. This risk is manifested by the need for each party to trust that the other will behave according to the rules of the contract. One way to address this trust deficit is to build the conditions of the earn-out into a smart contract so that the seller is automatically paid in accordance