Practical Considerations In Drafting Earnout Provisions

It is often said that an earnout can help a buyer and seller reach terms when there's a gap in terms of purchase price between a buyer and seller. This gap is usually the result of either a disagreement as to the future performance of the business being sold or an attempt by a buyer to ensure that the business being purchased maintains its economics for some period following the closing of the transaction.

Although earnout may help bridge this gap, it is often the subject of post-closing disputes and litigation. This article offers some practical considerations that should be taken into account in drafting and negotiating earnout provisions.

Initial Considerations

Before putting pen to paper, counsel should have a clear understanding of the motivations behind the earnout and the transaction from both the seller's and buyer's perspective. Obviously, any earnout is, in essence, a payment based upon some future event or outcome occurring that results in