Home Q&A Forum Can you explain the key provisions and potential risks involved in an Earn Out Agreement?

Business

Earn Out Agreement

California

Asked on Nov 12, 2024

Can you explain the key provisions and potential risks involved in an Earn Out Agreement?

I am currently in negotiations to sell my small business and the potential buyer has proposed an Earn Out Agreement as part of the deal. While I understand the basic concept of an earn out, I am unsure about the specific provisions that should be included in the agreement and the potential risks involved. I want to ensure that I am adequately protected and that the earn out arrangement is fair and reasonable for both parties.

Answers from 1 Lawyer

Answer

Business

California

Answered 482 days ago

Hello! My name is Dolan and thank you for using contractscounsel.com! This kind of agreement can be a great way to bridge the gap if you and the buyer have different views on your business's future value, but it’s not without its headaches. Basically, it lets the buyer pay part of the sale price later, depending on how the business performs. To keep things fair, you MUST have clear rules. I think for you need to nail down what performance targets you’re using such as revenue, profit, etc., and how they’ll be calculated. Be super specific to avoid arguments. Set a timeline for the earn-out, like 2–3 years, and agree on when you’ll get paid if targets are hit. You also need protection since the buyer will run the business after the sale. You don’t want them cutting corners or making decisions that could tank your payout. If the buyer mismanages things, you’re the one who loses. I think if you have some specific actions that the buyer promises to perform that you know helps the companies stay profitable or stay legally compliant (for example), including that in the agreement makes sense. You can ask for safeguards like minimum payments, say-so in major decisions, or money held in escrow. And, of course, make sure everything’s spelled out. We can draft these agreements for you here! Best of luck!

Use of the ContractsCounsel Q&A Forum does not create an attorney-client relationship between User and any Lawyer User. The Forum is not a substitute for legal advice from a lawyer but is intended to be educational and to help the user determine if legal services are necessary. The Forum, Content, and communications on the Forum do not constitute legal advice.

Meet some lawyers on our platform

Frank V.

15 projects on CC

CC verified

View Profile

Lori B.

184 projects on CC

CC verified

View Profile

Gregory B.

206 projects on CC

CC verified

View Profile

Stephen R.

11 projects on CC

CC verified

View Profile

What are the baseline terms I need in my MSA?

I am working on putting together a larger agreement that can cover everything that I do. I am a Digital Marketing agency and there are a lot of services we provide - Google Ads, SEO, backlinking, content writing, etc. I want to know what should go in my MSA.

View Donya G.

4.9 (61)

Donya G.

Answered Mar 31, 2021

Some of the baseline terms will be 1) services offered 2) time of delivery of the services 3) amount to be paid for the services 4) the responsibilities of the parties 5) what happens if the parties do not agree. DISCLAIMER The answers to these questions do not constitute legal advice and does not create an attorney-client relationship with the attorney and anyone who reviews these responses.

Read 1 attorney answer>

Business

Cease and Desist

California

Asked on Jul 28, 2021

Would like quote for a Cease and Desist letter

I independently do rescue animal work. A small nonprofit offered to help pay medical bills for my rescues. I learned that they have been posting my work as theirs instead of me. They sent me a text yesterday that they won't help me anymore yet I'm the person doing all the work. One of my rescues died and they are asking for donations on their social media platforms after his death yet they did nothing to contribute to his rescue. I asked them to remove their posts but they don't respond and are collecting donations on my work and rescues.

View Alen A.

5.0 (13)

Alen A.

Answered Oct 1, 2021

Hello, Based on the limited information, it would likely cost $750. This would include one telephone call, a letter, and one reasonable revision. Anything beyond that would be charged at the normal hourly rate of $200/hr.

Read 1 attorney answer>

Business

LLC

California

Asked on Jun 28, 2022

LLC or S-Corp?

I am starting a public speaking consulting business with one other person. Most of our work will be done virtually and do not need an office space and will not have a physical product. We do not have investors. We have received conflicting advice about whether to form a llc or an s-corp. The s-corp has been suggested by some as the best for tax purposes, but others have warned that it is much more expensive to start and harder to maintain. What would be best for our situation?

View Briana C.

5.0 (60)

Briana C.

Answered Jul 8, 2022

For a small service business with no outside investors, the LLC form probably offers you more advantages than the corporation. (For example, LLCs offer greater flexibility, fewer corporate formalities, and pass-through taxation which is especially beneficial in the early stages of an LLC if you have other income sources.) The S-Corp election does not affect your choice of entity (LLC or corporation). Either kind of entity can make the S-Corp election, which just tells the IRS how you should be taxed. You can form an LLC at the beginning and make the S-Corp election for that LLC in the future, if and when it makes sense (you will still be an LLC then, but an S-Corp for tax purposes only). The S-Corp election only makes sense to do once your net profits reach a certain level. The purpose of the S-Corp election is to reduce your taxes. Filing the S-Corp election is not itself very expensive, but you will need to incur the costs of running payroll. (LLCs don't have to run payroll.)

Read 1 attorney answer>

Business

Purchase Agreement

California

Asked on Oct 4, 2022

When asset purchase agreement vs. stock purchase agreement?

I am considering buying a business and I'm not sure what type of legal document I should use. I think I want to buy the business but I'm not sure what comes with that. The deal size is ~$100k and it is a printing company.

View Christopher M.

4.9 (8)

Christopher M.

Answered Oct 7, 2022

A stock purchase agreement only deals with the sale of stocks (which I know sounds a little obvious). The practical effect of which is you would own a percentage share of the company if that company is a corporation. If you used a stock purchase agreement the company would remain intact as a legal entity that you would have control over. If the company isn’t a corporation, or you’re not looking to keep the company intact, an asset purchase agreement would be you purchasing the assets of the company (up to and including the name and place of business) without necessarily taking control of the legal entity itself. Really which ever one you use they can both be drafted to accomplish your goals and more information would be needed to assess which one is right in your specific situation.

Read 2 attorney answers>

Employment

Employment Contract

California

Asked on Oct 4, 2022

What is fixed term employment contract?

I have been given a contract that says 'Fixed Term Employment Contract'. How is this different than a normal employment contract? Is there anything I need to consider before signing this?

View Christopher M.

4.9 (8)

Christopher M.

Answered Oct 7, 2022

Generally a fix term employment contract differs from a genera employment contract in that it has an end date. For example, at-will contracts continue until you are fired or quit, while a fixed term contract only continues until the term expires. The main points to look at would be what they are classifying you as (employee vs contractor), the length of the term (so you know when the contract is up), and how to renew the contract or if there is an automatic renewal. It would also be good to double check the contract for termination clauses, as quitting may be more complicated under a fixed term contract. Ultimately, as with all contract matters it’s probably best to reach out to an attorney to review the document to get more specific answers to your concerns.

Read 2 attorney answers>

Freelancers & Creators

Small Businesses

Startups

All of the Essentials:

Extra Help When Needed:

Basic LLC Formation

Premium LLC Formation

Can you explain the key provisions and potential risks involved in an Earn Out Agreement?

Answers from 1 Lawyer

Dolan W.

Frank V.

Lori B.

Gregory B.

Stephen R.

People Also Asked

What are the baseline terms I need in my MSA?

Donya G.

Would like quote for a Cease and Desist letter

Alen A.

LLC or S-Corp?

Briana C.

When asset purchase agreement vs. stock purchase agreement?

Christopher M.

What is fixed term employment contract?

Christopher M.

Ask a Question

California Business lawyers by city

Find lawyers and attorneys by city