Earn Out - Examples of LOI language?

searcher profile

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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commentor profile
Reply by an intermediary
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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Reply by an investor
from University of Notre Dame in Pittsburgh, PA, USA
Ben. Who is your legal council? They should be able to help here as the devil is in the details on earn outs and the sophistication or lack there of of the Seller and their council. Business deal (Revenue, Gross Margin are the two we see the most) and 1-3 years on the time as you negotiate the big picture. Simpler is better but what is controlable? If the seller is going away and you are stepping in as CEO and make all the decisions on pricing/margin you can see how conflicts can come up. Sometimes we see it tied to a specific customer or contract or project as well if that is a potential risk. as a binary event. Very deal and seller specific. Good luck.
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