Earnout early exit
December 12, 2024
by a searcher from Harvard University in Toronto, ON, Canada
I am exploring ways to exit a seller early in case a 30-months earnout is achieved in lets say 18 months.
Do you still continue to hold the employment agreement of seller for 30 months?
Or do you let him exit in 18 months? Do you consider 30-months earnout ebitda to be reached within 18 months?
What happens if seller bags a last minute contract to spike to earnout ebitda and if that 1 customer occupies more than 20% of revenue?
What are the things that go wrong in earnout?
What happens if within###-###-#### months you understand that no way the seller can hit the earnout, do you exit him or do you extend the time to hit earnout?
What if the earnout is hit in 18 months but employment agreement still is ongoing? If the seller quits job without notice what is the recourse?
from Bentley College in Miami, FL, USA
Early Earnout Achievement: If the seller hits the target early, you might want to tie their employment agreement to the earnout timeline, allowing an exit after payout. Alternatively, you could offer a shorter, consulting-style role post-earnout if continued involvement is valuable.
Last-Minute Contract Risk: Consider adding terms that exclude revenue concentration spikes from single contracts if they exceed a set percentage. This protects you from artificial earnout boosts.
Earnout Misses: If it’s clear the target won’t be met, you could renegotiate or end the relationship early, depending on what’s best for the business. Be sure to define how non-performance is handled.
Employment Agreement vs. Earnout: If the employment agreement extends beyond the earnout and the seller quits, having well-defined notice and clawback clauses can provide recourse.
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from University of Massachusetts at Lowell in Chicago, IL, USA