I’m working on my first LOI. I’m wondering how an earnout structure works.

The company’s performance in the last 3 years were not good. I spoke with the owners and they had some bad years due to unforeseen challenges that I deemed to be reasonable. But in the last year, the achieved $1m EBITDA.

I’d like to derisk the transaction by having the owners stay on for 3 years (they seem amenable to the idea) to ensure that the revenue is stable. I’m thinking of pegging the milestones to 2% revenue growth and maintaining the same EBITDA margins.

What are the details that I’d put into the LOI? For instance, do the owners stay on as members of the company, or are they outside consultants?