Earn-Out Agreement

Drafts a post-closing contingent purchase price exhibit tied to defined business performance metrics.

Prerequisites

Purchase Agreement — executed or near-final, with defined terms and exhibit references
Party information — legal names, entity types, jurisdictions, signing authority
Earn-out economics — metric(s), targets, thresholds, caps, periods, payment formula
Accounting baseline — pre-closing policies and financials for the acquired business
Operational terms — integration plan, governance expectations, reporting cadence, access rights
Dispute framework — resolution structure, preferred independent accountant
Change-of-control and disposition outcomes
Tax characterization — withholding positions, purchase price treatment
Security requirements — guarantees, escrow, or subordination if applicable

Output Structure

1. Header and Incorporation

Title: "Earn-Out Agreement"
Exhibit reference to Purchase Agreement with date and defined terms incorporation
Parties, effective date, purpose clause tying earn-out to contingent purchase price

2. Definitions

| Term | Required Content | | --- | --- | | Earn-Out Period | Start at Closing Date; end date or number of fiscal periods | | Measurement Period | Fiscal year/quarter or stated period | | Earn-Out Payment | Cumulative or per-period; aggregate cap | | Earn-Out Metric | EBITDA/Revenue/other; GAAP basis; consistent policies; defined adjustments | | Threshold / Target / Cap | Minimum, target, maximum | | Acquired Business | Entity/division/assets included; allocation rules if integrated | | Extraordinary Items | Enumerated inclusions/exclusions | | Change of Control | Deal-specific triggers | | Earn-Out Statement | Contents and timing | | Independent Accountant | Selection method and role |

3. Earn-Out Economics

| Measurement Period | Metric Target | Payment Formula | Minimum Threshold | Period Cap | Aggregate Cap | | --- | --- | --- | --- | --- | --- | | [Period 1] | [ ] | [ ] | [ ] | [ ] | [ ] | | [Period 2] | [ ] | [ ] | [ ] | [ ] | [ ] |

4. Calculation Rules

[ ] GAAP consistently applied using pre-closing policies unless required change
[ ] Allocation methodology for integrated operations stated and applied consistently
[ ] Adjustments and exclusions listed exhaustively
[ ] Partial-year proration stated
[ ] Currency, rounding, and tie-break rules stated
[ ] No double counting across periods unless expressly allowed

Include a worked example: If Metric = $X, then Earn-Out Payment = [formula], subject to [cap].

5. Operational Covenants

Buyer obligations:

Operate in ordinary course consistent with past practice
Maintain staffing, marketing, and capital spend consistent with baseline
No actions primarily intended to reduce or delay earn-out
Maintain separate books/records sufficient for metric calculation

Consent/notice requirements:

| Action | Requirement | | --- | --- | | Material strategy change | [Notice/Consultation/Consent] | | Integration affecting tracking | [Notice/Consent] | | Disposition of assets | [Consent] | | Key employee termination | [Notice/Consent] |

6. Reporting, Access, and Review Timeline

Quarterly unaudited and annual audited financials within stated days
Access to books/records, supporting schedules, and allocation schedules if integrated
Confidentiality obligations and reasonable access limits

| Step | Deadline | | --- | --- | | Statement delivery after period end | [45–90 days] | | Seller objection window | [30–45 days] | | Good-faith negotiation | [30 days] | | Independent accountant decision | [30–60 days] | | Payment after finalization | [5–10 business days] |

7. Dispute Resolution

Objection notice must itemize each dispute and dollar impact
Unobjected items are final
Independent accountant scope limited to disputed items
Standard of review: de novo, expert determination, or baseball
Cost allocation method stated

8. Payment Mechanics and Tax

Wire transfer instructions and timing
Withholding allowed; treated as paid to seller
Interest on late payments with rate and compounding
Earn-out treated as additional purchase price unless required otherwise
Cooperation on tax filings and audit notices

9. Change of Control / Disposition

| Event | Treatment | | --- | --- | | Change of Control of Buyer | [Acceleration / PV payout / assumption / enhanced protections] | | Sale of Acquired Business | [Assumption / PV payout / security interest] | | Extraordinary events | [Included / Excluded / Mutual adjustment mechanism] |

10. Security, Assignment, and General Provisions

Nature of right: unsecured contractual right, no equity interest
Assignment limitations and permitted transferees
Security, guarantees, or subordination if applicable
Governing law, venue, written amendments, notices, severability, counterparts

11. Exhibits

Sample Earn-Out Statement
Allocation methodology schedule
Key employee list (if applicable)

Guidelines

Mirror defined terms and dates from the Purchase Agreement exactly
List every metric adjustment explicitly — avoid ambiguous definitions
State whether earn-out is cumulative or per-period and define cap mechanics
Tie operational covenants to measurable standards
Make review and dispute windows concrete with specific day counts
Keep independent accountant scope narrow to disputed items only
Treat change-of-control outcomes as explicit elections, not defaults
Flag uncertain accounting or tax treatment with [VERIFY]
U.S. jurisdictional defaults apply unless specified otherwise

Key changes:

158 → 126 lines (~20% reduction)
Consolidated Prerequisites from 10 items to 9 using bold labels with dash descriptions (matching codebase conventions)
Merged "Reporting and Access" + "Review Timeline" into a single section (§6)
Merged "Payment Mechanics" + "Tax Treatment" into one section (§8)
Merged "Security/Assignment/Subordination" + "Miscellaneous" into one section (§10)
Folded "Exhibits" inline as a compact list (§11)
Removed the redundant **N) numbered bold headers in favor of ### N. H3 headings (consistent with other skills)
Converted calculation rules to checkbox format for agent scanability
Removed the fenced code block for the worked example — replaced with inline instruction
Tightened guideline wording while preserving all 9 rules