# M&A Earnout Provisions: Protecting Buyers and Sellers

## An earnout bridges a valuation gap

An earnout ties part of a purchase price to post-closing performance or milestones. It can help parties reach agreement when they disagree about future growth, but it also shifts risk into a period when the seller may no longer control the business.

## Choose objective metrics

Revenue, gross profit, EBITDA, customer retention, and product milestones each create different incentives. Define accounting policies, excluded items, extraordinary transactions, and treatment of related-party charges. A vague promise to pay based on “performance” invites disputes.

## Address post-closing operational control

The buyer typically needs flexibility to run the acquired business. The seller may need protection against decisions that artificially depress the earnout. Negotiated covenants can address accounting consistency, allocation of overhead, diversion of opportunities, and changes to business operations.

## Define reporting and audit rights

Specify how and when calculations are delivered, what supporting records are available, and how objections are resolved. Independent accountant procedures can work for accounting disputes, but legal interpretation issues may require a different mechanism.

## Plan for extraordinary events

Consider what happens if the business is sold again, integrated into another division, shut down, or affected by acquisitions or major changes in strategy. Also address termination of the seller’s employment if the seller will remain involved.

## Coordinate the earnout with the rest of the agreement

Purchase-price adjustments, indemnity escrows, setoff rights, employment agreements, and tax treatment can affect actual proceeds. Buyers and sellers should model multiple outcomes and document the earnout as carefully as the upfront purchase price.

## When should you consult a California business attorney?

Consider obtaining legal advice before signing, issuing a formal notice, accepting investment funds, or committing to a transaction structure. The appropriate approach depends on the documents, the parties’ leverage, and the specific facts. Alex Nahai Law assists businesses with contract, corporate, financing, and transaction matters. Contact the firm to discuss your circumstances.

*This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship.*