As the final agreement is put together, remember that it may include contingent payments, or earnouts. In order to achieve those, you must ensure that you have control over the aspects of the business necessary to hit the goals in question.
Earnouts are often a key component of a deal structure. They tie payment of some of the Seller’s total price to the Company’s future performance. In other words, the seller is required to hit financial targets, such as annual revenues, EBITDA, or customer growth, typically over 1-3 years, after which they will receive a payout.
Such deal terms often bridge gaps between the buyer and seller proposals for the total sale price. The earnout’s key contractual terms for the seller include control of resources, attainable targets, and clear definitions of expectations. Without these, a seller may not be able to meet the goals. We once created a 50 page earnout rule book governing how the seller could and would be in control of achieving his earnout. Using those rules, he met his goals and received the full value of the earnout.
Up next in this blog series, we’ll discuss the variables that show up between “signing” and “closing.”