Earnout Agreement Template

Earnout Agreement Template

This Earnout Agreement (the “Agreement”) is made and entered into as of [Effective Date] (the “Effective Date”) by and between:

Buyer: [Buyer Legal Name], [Entity Type], with an address at [Buyer Address] (“Buyer”).
Seller: [Seller Legal Name], [Entity Type], with an address at [Seller Address] (“Seller”).

This Agreement relates to the sale of [Target Company/Business Name] (the “Business”) pursuant to that certain [Asset Purchase Agreement/Stock Purchase Agreement] dated [Closing Agreement Date] (the “Purchase Agreement”). If there is any conflict, the Purchase Agreement will control unless stated otherwise.

1. Purpose and Earnout Structure

1.1 Purpose. The Parties agree that a portion of the purchase price will be contingent on the Business achieving certain performance targets during the Earnout Period.
1.2 Earnout Amount. The maximum earnout payable under this Agreement is $[Maximum Earnout Amount] (the “Earnout Cap”).
1.3 Earnout Period. The earnout period begins on [Start Date] and ends on [End Date] (the “Earnout Period”).

2. Earnout Metric and Definitions

2.1 Earnout Metric. Earnout will be calculated based on:
☐ Revenue
☐ EBITDA
☐ Gross Profit
☐ Net Income
☐ Customer Retention
☐ Units Sold
☐ Other: [Define Metric]
2.2 Calculation Rules. The metric will be calculated in accordance with:
☐ GAAP consistently applied
☐ The accounting policies used by the Business as of Closing
☐ The rules set out in Exhibit A (Earnout Calculation Rules)
2.3 Excluded Items (Optional). The following will be excluded from the calculation: [One-time items, intercompany charges, extraordinary expenses, acquisition costs, etc.].
2.4 Included Items (Optional). The following will be included: [Define inclusions].
2.5 Measurement Periods. Performance will be measured:
☐ Monthly ☐ Quarterly ☐ Annually ☐ Other: [Periods]

3. Earnout Targets and Payment Formula

3.1 Targets. The performance targets are: [Targets by period] (attach as Exhibit B if detailed).
3.2 Payment Formula. Earnout payments will be calculated as follows:

• If [Metric] is below [Threshold 1], Earnout Payment = $0

• If [Metric] is between [Threshold 1] and [Threshold 2], Earnout Payment = [Formula]

• If [Metric] is at or above [Threshold 2], Earnout Payment = [Formula], subject to the Earnout Cap
  3.3 Cap and Floor.

• Cap: Earnout is capped at $[Earnout Cap].

• Floor (Optional): Minimum earnout of $[__] applies if: [Condition].
  3.4 Partial Periods (Optional). If the Earnout Period includes a partial period, calculations will be prorated as: [Method].

4. Payment Timing and Method

4.1 Earnout Statement. Within [] days after the end of each measurement period, Buyer will deliver an earnout statement showing the calculation in reasonable detail (the “Earnout Statement”).
4.2 Payment Due Date. Any Earnout Payment due will be paid within [] days after delivery of the Earnout Statement, subject to dispute rights in Section 6.
4.3 Payment Method. Payments will be made by: ☐ ACH ☐ Wire ☐ Check ☐ Other: [Method].
4.4 Withholding. Buyer may withhold taxes as required by law and will provide appropriate tax documentation.

5. Operations During the Earnout Period

5.1 Good Faith Operation. Buyer will operate the Business in good faith during the Earnout Period.
5.2 Consistent Accounting. Buyer will apply the accounting rules described in Section 2 consistently throughout the Earnout Period.
5.3 Operational Covenants (Optional). Buyer agrees that during the Earnout Period it will:
☐ Maintain reasonable sales/marketing support
☐ Not intentionally divert customers or revenue away from the Business
☐ Not materially change pricing/terms in a way that is designed to reduce the Earnout
☐ Not allocate unusual overhead charges to the Business
☐ Other: [Covenants]
5.4 Buyer Discretion (Optional). Buyer retains the right to operate and integrate the Business as it sees fit, provided it does not take actions primarily intended to avoid or reduce the Earnout.

6. Review, Audit, and Dispute Resolution

6.1 Review Period. Seller has [] days after receiving an Earnout Statement to review it and provide written notice of any dispute (a “Dispute Notice”).
6.2 Good Faith Resolution. The Parties will attempt to resolve disputes in good faith within [] days after a Dispute Notice.
6.3 Independent Accountant. If unresolved, disputes will be submitted to an independent accountant mutually agreed by the Parties (the “Independent Accountant”).
6.4 Scope of Review. The Independent Accountant will decide only the disputed items and will apply the rules in Exhibit A.
6.5 Fees. The Independent Accountant’s fees will be paid by:
☐ Buyer ☐ Seller ☐ Split equally ☐ Allocated based on outcome
6.6 Final and Binding. The Independent Accountant’s determination will be final and binding, except for fraud or manifest error.

7. Access to Records

7.1 Information Rights. During the Earnout Period, Buyer will provide Seller reasonable access to information necessary to verify calculations, subject to confidentiality and reasonable limitations.
7.2 Confidentiality. Seller will keep all non-public information confidential and use it only for earnout verification.
7.3 Audit Limitations. Audits may be limited to: ☐ Once per period ☐ During normal business hours ☐ With [__] days’ notice ☐ Other: [Limits].

8. Acceleration and Special Events (Optional)

8.1 Change of Control. If Buyer sells the Business or there is a change of control during the Earnout Period, the earnout will be handled as follows:
☐ Earnout accelerates and becomes immediately due in the amount of $[__]
☐ Targets are deemed achieved at: [Level/Formula]
☐ Successor must assume obligations in writing
☐ Other: [Terms]
8.2 Material Restructuring. If the Business is materially restructured, the Parties will: [Adjust metric / renegotiate / use prior-period baseline].
8.3 Force Majeure/Extraordinary Events (Optional). Extraordinary events are handled as: [Adjustments/Exclusions].

9. Setoff and Security (Optional)

9.1 Setoff. Buyer may set off earnout payments against amounts owed by Seller under: ☐ Purchase Agreement ☐ Indemnity claims ☐ Other: [Source], subject to: [Limits].
9.2 Escrow/Security (Optional). Earnout obligations are secured by:
☐ Escrow of $[__]
☐ Letter of credit
☐ Guarantee
☐ Other: [Security]

10. Representations and Warranties

10.1 Authority. Each Party represents it has authority to enter into this Agreement.
10.2 No Reliance (Optional). Each Party acknowledges it is not relying on statements not in the written agreements.

11. Notices

11.1 Notice Method. Notices must be sent by: ☐ Email ☐ Certified mail ☐ Courier ☐ Other: [Method].
11.2 Notice Contacts.

• Buyer Email: [Email]

• Seller Email: [Email]

12. Governing Law and Dispute Resolution

12.1 Governing Law. This Agreement is governed by the laws of [State].
12.2 Dispute Resolution. Disputes will be resolved by:
☐ Negotiation
☐ Mediation
☐ Arbitration
☐ Court litigation in [County, State]
12.3 Attorneys’ Fees (Optional). Prevailing party attorneys’ fees: ☐ Yes ☐ No ☐ Limited to: [Details].

13. Miscellaneous

13.1 Entire Agreement. This Agreement, together with the Purchase Agreement, is the entire agreement regarding the earnout.
13.2 Amendments. Amendments must be in writing and signed by both Parties.
13.3 Assignment. Neither Party may assign this Agreement without the other Party’s consent, except to a successor as permitted in Section 8.
13.4 Severability. If any provision is unenforceable, the rest remains effective.
13.5 Counterparts; Electronic Signatures. This Agreement may be signed in counterparts and by electronic signature.

Signatures

By signing below, the Parties agree to be bound by this Earnout Agreement as of the Effective Date.

Buyer: [Buyer Legal Name]
Title/Role: [Title]
Date: [Date]
Signature: ___________________________

Seller: [Seller Legal Name]
Title/Role: [Title]
Date: [Date]
Signature: ___________________________