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How Earnouts in an M&A Deal Work

How Earnouts in an M&A Deal Work

Earnouts are part of a legally enforceable contract you have with the buyer known as an Asset Purchase Agreement or Stock Purchase Agreement.
This is largely based on a trustworthy arrangement between you and the buyer/successor and if the milestones are achieved there’s not any argument to the contrary, which is all backed by a legally enforceable and binding document that you can take action on. Enforcing that depends on the risk and the reward.
Pragmatically speaking, there’s not too many other ways to enforce that document otherwise.
You can make something personally guaranteed or securitize the earnout.
But without collateral that is tough to do and most buyers don’t go for that.
Another idea is to piecemeal the sale, which would be to sell part of the business over time. You hold back something important like inventory.
For instance, you sell the business/website/name/etc now, and sell the inventory to them over time as they needs it where they pay for it when he orders it in. B
You have to see if the buyer would go for something like that with their offer.

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Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.

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