Earn Out - Examples of LOI language?

February 01, 2023

by a searcher from Emory University - Goizueta Business School in Atlanta, GA, USA

We are building a quote for a ~$20m EV manufacturing business including earn out as well as seller note and rollover equity. Would anyone be willing to share sample LOI language used for an earn out? Appreciate any examples that might be sent. Please feel free to email me at redacted

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Reply by a searcher
from Columbia University in Bend, OR, USA

2. Investor intends to structure the transaction as a purchase of 80% of the capital shares of the Company, including a defined Target Net Working Capital, for a purchase price of $XXXXXXXXX (the “Purchase Price”), which is calculated assuming each Party contributes their 80/20 pro rata share of $XXXXXX in additional working capital at closing. Investor will pay the Purchase Price at Closing as follows: a. $ XXXXXXXX in cash at Closing. b. $XXXXXXX in the form of a subordinated secured promissory note (“Seller Note”) from the Company payable to ___________ (“Current Shareholders”). 3. For purposes herein, the term Target Net Working Capital is a level of working capital consistent with historical financial statements but is to be defined as: inventory and current assets minus current liabilities excluding indebtedness for borrowed money and any income tax items. This Target Net Working Capital shall be $XXXXXX If the actual Net Working Capital at Closing is more or less than the Target Net Working Capital there shall be a dollar-for-dollar adjustment upward or downward of the Purchase Price. 4. The Seller Note would bear interest at the rate of 8% per annum, simple interest with a five (5) year term commencing upon Closing and secured by Investor’s shares of Company and or other forms of security as the parties mutually agree. The promissory note would be subordinate to any third party financing. Seller Note shall include a right of setoff for any claims for indemnity or otherwise brought by Investor under or in connection with the Agreement.

Reply by a professional
from University of Texas at Austin in Austin, TX, USA

As a M&A advisor- I don't really advise earnouts. I call them 'transaction discounts" ---- IF we're going to do an earnout, it is on the portion of the value that's attributed to more speculative business, and it's REVENUE based, not profit. Cannot hold a seller to a profit number, when they are not controlling OPEX/CAPEX.

Would recommend something that isn't all or nothing. I.e. 80% of target revenue reached, some % of earn-out paid.

If an earn-out is to bridge a delta between what the buyer wants to pay and what the seller wants; I find some other way to work around this. Poorly structured earn-outs can create a really toxic seller relationship.

Also as someone hinted at earlier ---- if your deal has SBA financing - you need to go the route of forgivable note, and they will have to be subordinated - including term. I.e., if your SBA term is 10 years, the seller note has to be payable I *think* after year 5. [Ask your SBA lender].

AND - lastly - if you are crafting an LOI with an earnout for a $20MM EV business - you should be discussing this with your attorney. Don't let them charge you a bazillion $$ to write the whole document - but I strongly recommend your attorney provide this advice / language.

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