M&A: Consider the following when structuring earnout payment

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Earnout provisions in M&A sale and purchase agreements require careful consideration as there are many parts to the provisions. It is important to ensure there is no ambiguity to avoid dispute.

Consider the following when structuring earnout payment:

1.    What is the performance metric that needs to be achieved in order for the seller to earn the earnout payment?
The performance metric may be financial (e.g. achievement of EBITDA, profit or revenue over a specific period) or non-financial (e.g. awarding of a contract or acquisition of not less than a certain number of new customers over an agreed period).

2.    When must the performance metric be achieved in order for the seller to earn the earnout payment?

3.    Who is responsible for the preparation of accounts (if any) upon which the calculation of earnout is based on? When must the accounts be delivered to the counterparty?

4.    How is the earnout amount calculated? Are there any accounting practices or principles to be used for the calculation of earnout payment? If appropriate, set out the formula and illustration in the agreement.

5.    When will the earnout be paid?

6.    Is the earnout to be paid in a lump sum or instalments?

7.    How will disputes on earnout be resolved? What is the notice period to raise an objection? Should an external expert be appointed to resolve disputes on accounts?  Who will bear the costs?

8.    Does the buyer have the right to set off the earnout amount to be paid to the seller against any amount that the seller may be owing to the buyer?

9.    What are the safeguards during the earnout period to ensure the parties do not act in a manner that is detrimental to the other party?

For pitfalls of earnout, see my earlier post.


This post was first posted on Linkedin on 20 April 2023.

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