"Earnout" clauses are found in:
Answer: (d), acquisition agreements
The term "earnout" refers to a contract provision in an acquisition agreement stating that the seller of a company is to obtain additional future compensation for the sale of the company based on the future financial performance of the acquired company as operated by the buyer. For example, the earnout could be structured to provide additional cash payments to the seller equal to 10% of the gross revenues of the business for the two year period following the sale. Sellers prefer to have earnouts tied to gross sales, whereas buyers prefer to have earnouts tied to net profitability. Earnout clauses can be exceedingly difficult to draft, and often lead to litigation among the parties.
