Drafting Earnout Provisions That Actually Work

Highlights

• Earnouts can help bridge valuation gaps between buyers and sellers but frequently lead to post-closing disputes over financial metrics, operational decision-making, financial reporting and contractual interpretation.
• Careful drafting can reduce litigation risk by clearly defining financial and operational metrics, allocating buyer discretion and selecting dispute resolution mechanisms that correspond to the nature of potential disagreements.
• Earnout structures can also have significant tax consequences, including whether payments are treated as additional purchase price or compensation, making coordination between transaction counsel and tax advisors important during the drafting process.