I am negotiating with a seller of a b2b services company, they do not want to entertain an earnout but they would like to see language in an LOI that compensates them for work in progress because they could potentially land a large service contract between signing the LOI and the close. How have others addressed this issue?
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1) Seller is not entitle to anything if the new contract, when completed, will not increase profit beyond historical performance.
2) Seller is not entitled to anything if the new contract profit is already baked into your value determination.
3) If the new contract is neither #1 or #2 above then it is in addition to the expected profit. In this case seller is entitled for a share of the resulting "benefit". The calculation of such benefit to be given with seller is complex as Bill Wiersema has pointed out. Variables range from timing of expenses, collection, expected profitability, accounting method, etc. Happy to help. Just DM me.