FAQ About Earnout Agreements

An earnout is a contract that states that the seller of a business may earn additional compensation in the future if the business achieves certain financial goals. These financial goals are usually a percentage of gross sales or earnings. Many times when a business makes an earnout agreement, they use an earn out CT lawyer to help them throughout the process. If you are about to create an agreement, your earn out CT lawyer will help you with any questions that you have; additionally, this article answers many of the frequently asked questions about earnouts.

 

How are earnouts used when a seller is asking for more than the buyer can afford?

When a seller is asking for more than a buyer can afford, earnout provision can be implemented. This means that the buyer and seller will agree on a lower purchasing price, but the seller will receive a percentage of the gross sales over a determined amount of time. How high the percentage is and how long it needs to be paid need to be negotiated with an earn out Connecticut lawyer.

 

Are earnouts considered debt?

Earnouts aren’t seen as debt, but as compensation and liabilities. This is because the buyer will potentially need to make payments to the seller in the future, depending on the success of their business.

 

What elements need to be considered while structuring an earnout deal?

When a deal is being created, the following elements are important to the agreement: total purchase price, up-front payment, contingent payment, earnout period, performance metrics, payment methodology, and threshold and contingent payment formula.

 

How do I negotiate my earnout agreement?

While the agreement is being drafted, the buyer and seller will need to negotiate so that each party is happy. This can be accomplished by both parties drafting the agreement together, rather than one side making it and the other reviewing. Every negotiation will be different, depending on the needs of both parties.

This article answers some of the frequently asked questions about earnout agreements. If you need more information, or help throughout the process, make sure to hire an earn out Connecticut lawyer.