Alvarez & Marsal advises on avoiding earnout dispute pitfalls

Management consulting firm Alvarez & Marsal has released an analysis offering guidance to companies on structuring and managing earnout provisions – future performance-based additional purchase prices – within mergers and acquisitions. The firm aims to help businesses avoid common disputes that can emerge concerning these clauses post-transaction.

Earnout provisions are frequently utilized in business sales where buyers and sellers struggle to agree on a fixed purchase price. They allow sellers to receive supplementary consideration if the business achieves specific future performance metrics. Such clauses can help bridge valuation gaps between parties, incentivize seller involvement in the business's success, and offer deferred tax benefits to the seller.

According to Alvarez & Marsal, disputes often arise from unclear performance metrics or the buyer's operational conduct during the earnout period. Common financial metrics include revenue, net income, or EBITDA, though non-financial metrics like new customer acquisition can also be employed. The consultancy emphasizes that metrics must be clearly defined and designed to align both parties toward the business's success.

It is crucial in M&A to precisely define how the buyer will operate the acquired business during the earnout period. This may include obligations to maintain a certain financing level, retain key personnel, or exert commercially reasonable efforts to sell products. The agreement should also stipulate remedies if the buyer fails to meet these obligations.

Wau.org.