SRS Acquiom, as the seller`s representative, generally wants to see the following provisions in the dispute resolution section of the sales contract: buyers and sellers will often negotiate vigorously whether there should be controls or other restrictions on how the buyer handles the purchased transaction during the earnout period. Buyers obviously don`t want restrictions; They claim that they need total discretion to run business, to deal with rapidly changing business conditions, as we are currently seeing with the pandemic. However, sellers want a fair chance of earning the Earnout, especially when the seller`s management team is working for the buyer. Often, the seller is given «soft» promises for financial assistance or other resources that the buyer makes available to the company after the conclusion so that the Earnout can be achieved, but these «soft» promises never reach the sales contract and are usually not enforceable. The natural tension between seller and buyer over buyer`s business decisions will intensify if the earnout period is long. In this current context, parties to M&A transactions should use earnouts more often. For parties structuring a transaction to deal with future uncertainties related to the pandemic, Earnouts can bridge the valuation gap between buyers and sellers. The goal of a earnout is to attribute the future risks and opportunities of a target company, with both parties enjoying a successful outcome and sharing the risk if things don`t work out as expected. However, earnouts are inherently difficult to design and implement, as they require parties to anticipate what might happen in the future. The sharp increase and decrease in earnout usage that followed was due to the economic recession. Economic volatility has made it difficult for projects to develop and tight credit conditions have made it more difficult to finance transactions. As a result, buyers and sellers have increasingly turned to earnouts to close deals. However, in recent years, buyers have regained confidence and competition for quality investment opportunities has increased, creating a seller`s market.
The deal`s prices have also risen, and with increasing leverage in negotiations, sellers are less willing to discuss earnout deals. Nevertheless, earnouts will remain commonplace in M&A transactions. Clear, specific and contextualised formulations – and strict adherence to established procedures – are essential. In order to reduce the risk of litigation, earnout rules should be formulated as clearly and specificly as possible and the provisions and procedures applicable to each transaction should be contextualised. Lawyers and businessmen who understand the specific enterprise and its sector, business activities and accounting practices should cooperate closely in the development of these provisions. . . .