Earnouts 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 (or able) 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, such as:
- Buyer breach of post-closing covenants
- Termination of key employee/s
- 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 Lisa Riley (480) 686-9031 to learn more about deal structures and how we protect your interests in a sale.