An “earnout” is an important component of many transactions involving the sale of a business. The purpose: to bridge the valuation gap when parties have different views about the future performance of the business. A portion of the consideration becomes contingent on whether specified future metrics—such as revenue, profits, or sales of specific categories of goods—are met, or “earned.”  Earnouts thus allow both parties to prove their basic assumptions about the value of the business.

The concept is easy to understand. The implementation is far from simple. It has become a truism that the decision to “punt” on agreeing to value inevitably moves the issue from the negotiation table to the courtroom (now, in many cases, the arbitration conference room). As Delaware Vice Chancellor J. Travis Laster stated in the 2009 Airborne Health, Inc. v. Squid Soap, LP decision:  “[S]ince the value [of the business] is debatable and the causes of underperformance equally so, an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.”