Mitigating the Risk of Post-Closing M&A Earnout Disputes

Corporate attorneys Chad Barton and Claire Lydiard co-authored a Law360 article reviewing the factors that increase the likelihood of post-closing disputes in mergers and acquisitions (M&A) transactions using contingent payment mechanisms like earnouts. The authors explain that in deals incorporating earnouts, the buyers and sellers agree to a base purchase price paid at closing, while giving sellers the opportunity to "earn" additional amounts based on the sold company's future financial performance or achievement of defined milestones. Earnouts thus enable parties to realize a transaction when a commercial agreement might not otherwise be possible, such as through providing a buyer financing alternatives, addressing specific known risks or bridging the gap between valuation expectations. However, parties still need to take care to address issues, no matter how small or ancillary they may seem, to avoid post-closing disputes. The article highlights several steps to take to ensure a smooth and profitable transaction that proves mutually beneficial to all parties involved.

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