Earnouts – (Be)Devil is in the Detail

In an earlier M&A Update, we discussed the attraction of using earnouts to bridge valuation gaps but quoted VC Laster’s astute description of earnouts as “often convert[ing] today’s disagreement over price into tomorrow’s litigation over outcome.” Since then, we have seen a continued steady pace of lawsuits brought by disappointed sellers asserting that an earnout milestone in fact has been satisfied or that the buyer’s failure to use the requisite efforts caused the failure to hit the milestone or maximize the earnout.