“Earnout” is a deal term used in some M&A transactions. The Earnout determines whether part of the Aggregate Purchase Price will be paid to the Seller if the target company or business achieves certain specified performance criteria after the Closing. One benefit of an Earnout is that it can help the deal parties reach agreement on Valuation during negotiations. There are, however, many difficult issues concerning an Earnout, which can result in challenging negotiations between the Buyer and Seller. For example, the Seller should consider addressing the available resources and management control that it will have after the Closing to achieve certain Milestones or other Earnout metrics.

Sellers should consider discounting the value of an Earnout given the related risks and uncertainties to achieve the related Milestones and other Earnout metrics. Careful drafting of the Earnout provisions is necessary because they often result in post-Closing disagreements and even disputes.