Bass, Berry & Sims attorney Price Wilson authored an article published by Bloomberg Law outlining practical considerations when drafting earnout provisions in M&A transaction documents.
Earnouts have become increasingly prevalent in M&A transactions when a buyer and seller cannot come to agreement on purchase price.
When drafting an earnout, Price stressed the importance of understanding the purpose and motivations behind the earnout from the perspective of both the buyer and seller. Price also highlighted considerations for the actual drafting of the earnout provisions. Vagueness will lead to future issues; therefore, it is vital to include as much detail as possible. In some cases, it is advisable to attach example calculations.
There are significant pitfalls associated with earnouts. Financial definitions should be precise and counsel should be mindful of antitrust considerations, existing or future credit arrangements, and healthcare regulatory concerns.
“Drafting earnout provisions requires thoughtful consideration of the deal terms, the post-closing plans for the business, and the facts and circumstances that may affect the achievement of the earnout,” Price explained. “Specificity is key in avoiding disagreements down the road.”
The full article, “Practical Considerations in Drafting Earnout Provisions,” was published by Bloomberg Law on June 14 and is available online.