Earnout Agreement Template

EARNOUT AGREEMENT TEMPLATE FAQ

What is an earnout agreement?

An earnout agreement is a contract used in a business sale where part of the purchase price is paid later based on the business meeting agreed performance targets. It helps bridge valuation gaps by tying additional payments to results after closing, such as revenue, EBITDA, gross profit, customer retention, or other measurable metrics.

When should you use an earnout agreement?

Use it when a buyer and seller can’t agree on a fixed purchase price, when future performance is uncertain, or when the seller will stay involved after closing. It’s also common when the business has volatile revenue, depends heavily on key customers, or is scaling quickly.

What should be included in an earnout agreement?

It should include the earnout period, the exact metric(s) and calculation method, accounting rules, any caps/floors, payment timing, reporting and audit rights, operational covenants (what the buyer must or must not do), events that accelerate or end the earnout, tax treatment basics, and dispute resolution for calculations.

How do you avoid earnout disputes?

Disputes usually come from vague metrics or the buyer changing operations in a way that affects results. Clear definitions (what counts as revenue, excluded items, consistent accounting standards), reporting rights, and reasonable limits on operational changes during the earnout period reduce conflict.

What happens if the buyer sells the business or changes it significantly during the earnout?

Many earnout deals include protections such as acceleration (paying the remaining earnout early), treating a change of control as hitting targets, or requiring the buyer to ensure the successor honors the earnout. This template includes options you can tailor based on your deal.

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