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Earnout Agreement for the United Kingdom

Earnout Agreement Template for England and Wales

An Earnout Agreement is a legally binding document under English and Welsh law that structures additional purchase price payments based on the future performance of an acquired business. It bridges the valuation gap between buyer and seller by making part of the purchase price contingent on achieving specific performance targets. The agreement details the calculation methodology, payment terms, conditions, and monitoring mechanisms for these future payments.

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What is a Earnout Agreement?

The Earnout Agreement is commonly used in merger and acquisition transactions under English and Welsh law when there's uncertainty about a business's future performance or disagreement about its valuation. This document establishes the framework for additional payments to the seller based on the business achieving specific performance metrics post-acquisition. The agreement typically includes detailed provisions for calculating earnout payments, defining performance metrics, specifying payment terms, and establishing dispute resolution mechanisms. It's particularly valuable in situations involving high-growth companies, uncertain market conditions, or when retaining key personnel is crucial to the business's success.

What sections should be included in a Earnout Agreement?

1. Parties: Identification and details of all contracting parties

2. Background: Context of the transaction and purpose of the earnout arrangement

3. Definitions: Key terms used throughout the agreement including financial, accounting and performance-related definitions

4. Earnout Calculation: Formula and methodology for calculating earnout payments, including specific metrics and thresholds

5. Payment Terms: Timing, method, and conditions for earnout payments, including any adjustments or deductions

6. Performance Metrics: Detailed specification of targets and measurements that trigger earnout payments

7. Accounts and Records: Requirements for maintaining and providing access to financial records and supporting documentation

8. Dispute Resolution: Procedures for resolving disagreements about calculations or performance metrics

9. Governing Law and Jurisdiction: Specification of English and Welsh law as governing law and relevant jurisdiction

What sections are optional to include in a Earnout Agreement?

1. Employment Conditions: Terms linking earnout to continued employment of key personnel, including non-compete and non-solicitation provisions

2. Anti-dilution Provisions: Protections against share value dilution where earnout involves share-based payments

3. Acceleration Provisions: Circumstances triggering early payment, such as change of control or business sale

4. Tax Provisions: Specific arrangements for tax treatment and allocation of tax liabilities

5. Security Arrangements: Provisions for securing earnout payments through escrow or other mechanisms

What schedules should be included in a Earnout Agreement?

1. Schedule 1 - Calculation Examples: Detailed examples showing how earnout calculations will work in various scenarios

2. Schedule 2 - Performance Criteria: Detailed metrics, measurement methodologies, and specific targets for each period

3. Schedule 3 - Financial Definitions: Comprehensive definitions of financial terms and accounting principles to be applied

4. Schedule 4 - Form of Payment Notice: Template for formal payment notifications and supporting documentation requirements

5. Schedule 5 - Excluded Items: List of items to be excluded from earnout calculations (e.g., extraordinary items, one-off events)

Authors

Alex Denne

Head of Growth (Open Source Law) @ Ƶ | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Jurisdiction

England and Wales

Publisher

Ƶ

Document Type

Payment Agreement

Sector

Banking

Cost

Free to use
Relevant legal definitions





































Clauses


































Industries

Companies Act 2006: Primary legislation governing company operations, including share capital, transfers, directors' duties, and corporate governance requirements

Law of Property (Miscellaneous Provisions) Act 1989: Key contract law legislation affecting property and contractual arrangements, particularly relevant for contract formation and execution

Financial Services and Markets Act 2000: Regulates financial activities and promotions, particularly relevant if the earnout involves regulated financial activities

Corporation Tax Act 2009: Governs corporate taxation aspects of earnout payments and related transactions

Income Tax Act 2007: Regulates personal income tax implications of earnout payments and related transactions

Employment Rights Act 1996: Relevant when earnout provisions are linked to employment terms or conditions

Competition Act 1998: Ensures earnout arrangements do not breach competition law requirements or create market dominance issues

Data Protection Act 2018: Governs the handling of personal data in relation to earnout arrangements and associated record-keeping

Limitation Act 1980: Sets time limits for bringing claims and affects contractual limitation periods in earnout agreements

Misrepresentation Act 1967: Governs warranties, representations, and remedies for misrepresentation in earnout agreements

Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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