Appendix: Sample Earnout Language
This is an example of the language that may describe your earnout. Like the LOI, each commitment is different, but this should give you a sense for the type of language that’s used.
Earnout
The Purchaser shall pay the Seller the following amounts in addition to the Closing Purchase Price:
For the 2022 Earn-Out Timeframe, if the 2022 Earn-Out EBITDA is less than $AMOUNT, the 2022 Earn-Out Payment shall be $0. If the 2022 Earn-Out EBITDA is equal to or more than $AMOUNT, the 2022 Earn-Out Payment shall be $AMOUNT.
For the 2023 Earn-Out Timeframe, if the 2023 Earn-Out EBITDA is less than $AMOUNT, the 2023 Earn-Out Payment shall be $0. If the 2023 Earn-Out EBITDA is equal to or more than $AMOUNT, the 2023 Earn-Out Payment shall be $AMOUNT.
“2022 Earn-Out Timeframe” and “2023 Earn-Out Timeframe” refer to the calendar year ended December 31, 2022 or December 31, 2023, respectively.
“2022 Earn-Out EBITDA” and “2023 Earn-Out EBITDA” refer to the consolidated net income of the Seller’s sales team for the respective Earn-Out Periodes, determined according to GAAP, as consistently applied. This calculation will exclude all extraordinary items of income, interest and investment income, and gains on any sale or similar transaction not in the ordinary course of business.
The Seller sales team, for the purposes of calculating the 2022 Earn-Out EBITDA and 2023 Earn-Out EBITDA, refers to the Seller’s business as conducted by the employees of the Purchaser who are allocated to such sales team. To clarify, revenue (and related expense) will be allocated among Purchaser sales teams based on which sales team performs the applicable customer work, not which sales team sourced the customer.
The Purchaser is obligated to provide the Seller with monthly unaudited, consolidated financial statements of the Seller sales team within 15 days after the end of each month throughout the 2022 Earn-Out Timeframe and 2023 Earn-Out Timeframe.
These statements shall include operating income, net income, EBITDA, adjusted net income, and adjusted EBITDA, and each adjustment shall be specified in detail and accompanied by notes.
Within 30 days of receiving the Earn-Out Payment Notice, the Seller may dispute the statement and deliver a Disputed Earn-Out Payment Notice to the Purchaser stating the basis for their objection to the Applicable Earn-Out Payment and the proposed amount, including the disputed items. The Seller and the Purchaser will then attempt to reach an agreement on the Applicable Earn-Out Payment as soon as possible. If the Seller fails to deliver the Disputed Earn-Out Payment Notice or accepts the calculation of the Applicable Earn-Out Payment within the specified time, the Applicable Earn-Out Payment in the Earn-Out Payment Notice will be considered accurate and final.
If the Seller and the Purchaser cannot reach an agreement on the Applicable Earn-Out Payment within 30 days of the delivery of the Disputed Earn-Out Payment Notice, the Designated Arbitrator will be engaged to resolve the dispute. The Designated Arbitrator will only address the disputed items specified in the notice, and will select either the Seller’s or the Purchaser’s proposal, and then determine the Applicable Earn-Out Payment as modified only by the resolution of such items. The non-prevailing party shall bear the fees, costs, and expenses of the Designated Arbitrator. If there are multiple disputed items and a party prevailed on some but not all of them, then the non-prevailing party will be determined based on the difference between their non-prevailing and prevailing positions.
Within 30 days after the settlement of the Applicable Earn-Out Payment, the Purchaser shall pay the Applicable Earn-Out Payment to the Seller.
