Earnout Agreement: Definition & Sample

​​An earnout agreement, also referred to as an earn-in or earn-out, is a type of acquisition payment structure. The acquired company receives payment in cash and equity over time, depending on how well the company meets specific financial goals.

An earnout agreement can be used for many purposes, including protecting the value of the business being sold, incentivizing management to stay with the business after closing, and allowing sellers liquidity while maintaining some degree of control over their companies post-closing.

Common Sections in Earnout Agreements

Below is a list of common sections included in Earnout Agreements. These sections are linked to the below sample agreement for you to explore.

Earnout Agreement Sample

This Earn-Out Agreement (this “ Agreement ”) is entered into as of July 26, 2010 by and among Addus Healthcare (South Carolina), Inc., a Delaware corporation (the “ Purchaser ”), Addus HomeCare Corporation, a Delaware corporation, as Guarantor of this Agreement, Advantage Health Systems, Inc., a South Carolina corporation (the “ Earn-Out Recipient ”), Paul Mitchell as Seller Representative (the “ Seller Representative ”) and the Sellers (each, a “ Seller ”, and collectively, the “ Sellers ”) set forth on Exhibit A to the Asset Purchase Agreement, dated as of the date hereof, by and among the Purchaser, the Earn-Out Recipient and the Sellers (the “ Purchase Agreement ”).

WHEREAS, pursuant to the Purchase Agreement, on the date hereof, (A) the Earn-Out Recipient is selling certain assets used or held for use by the Earn-Out Recipient in the conduct of the Business (as defined in the Purchase Agreement) as a going concern (collectively, the “ Acquired Business ”) to the Purchaser and (B) the Purchaser proposes to (x) assume certain of the liabilities and obligations of the Earn-Out Recipient and (y) pay to the Earn-Out Recipient cash and other consideration provided in the Purchase Agreement, including, without limitation, the right to the Earn-Out Payments (as further provided in this Agreement) (collectively, the “ Acquisition ”);

WHEREAS, pursuant to the Purchase Agreement, the execution and delivery of this Agreement is a condition precedent to the consummation of the Acquisition; and

WHEREAS, capitalized terms that are used but not identified herein shall have the meaning assigned to such terms in Annex I attached hereto.

NOW, THEREFORE, in consideration of the premises and of the covenants and provisions contained herein, the parties hereby agree as follows:

1.1 Earn-Out Payments . Pursuant to the terms and subject to the conditions set forth herein, the Earn-Out Recipient shall be eligible to receive in the future additional, deferred consideration payable by the Purchaser based on achievement by the Acquired Business of the EBITDA Targets during the calendar years ending December 31, 2010 and December 31, 2011, as further provided in this Agreement. The amount of the Earn-Out Payment payable to the Earn-Out Recipient with respect to each of the years ending as of such dates shall be determined pursuant to Exhibit A hereto. Such amounts will be payable to the Earn-Out Recipient if and only if the Acquired Business is able to (i) satisfy the conditions set forth herein and (ii) meet the requirements and achieve the EBITDA Targets set forth on Exhibit A . Timing and Manner of Earn-Out Payment . Subject to Sections 1.4, 1.5 and 1.6 hereof, on each Earn Out Payment Date, the Purchaser shall pay and deliver to the Earn-Out Recipient, the Earn-Out

Payments, if any, that shall be due to the Earn-Out Recipient in accordance with Exhibit A . The Earn-Out Payments payable to the Earn-Out Recipient shall be payable in accordance with the terms and subject to the conditions of this Agreement (including, without limitation, those conditions set forth on Exhibit A ), by wire transfer of immediately available funds to the bank account designated by the Earn-Out Recipient to the Purchaser on Exhibit B attached hereto. The right of the Earn-Out Recipient to receive the Earn-Out Payments shall not be transferable, in whole or in part, to any other Person without the prior written consent of the Purchaser, which shall not be unreasonably withheld or delayed; provided, however , that Earn-Out Recipient may transfer its right to receive the Earn-Out Payments to one or more Sellers without the consent of the Purchaser upon prior written notice to the Purchaser of such transfer, and each such Seller may transfer his or her right to receive the Earn-Out Payments by testate or intestate successor or to one or more of the other Sellers. Earn-Out Report . Within 30 days (or as soon as reasonably practicable) after receipt by the Purchaser of the consolidated audited annual financial statements for Addus HomeCare Corporation, a Delaware corporation (“ Addus HomeCare ”) for the fiscal year ending on each of December 31, 2010 and December 31, 2011 (the “ Audited Financial Statements ”), the Purchaser will prepare and deliver to the Earn-Out Recipient a report, setting forth, in reasonable detail, a computation of EBITDA for the Acquired Business (which shall be computed in accordance with the definition of “EBITDA” set forth in Article II hereof) during the preceding fiscal year, and attaching a copy of the Audited Financial Statements and a copy of the consolidating financial statements applicable to the Purchaser for such period (each, an “ Earn-Out Report ”). The calculation of EBITDA in such Earn-Out Report shall be consistent with the methodology used in the report of Dixon Hughes PLLC (the Purchaser’s accountants), dated May 18, 2010, and in accordance with Article II hereof. Unless the Earn-Out Recipient, within thirty (30) days after receipt of the Earn-Out Report, notifies the Purchaser in writing that it objects to the computation of EBITDA of the Acquired Business set forth in the Earn-Out Report, the Earn-Out Report shall be deemed accepted by the Earn-Out Recipient, the Seller Representative, the Sellers and the Purchaser and will be binding and conclusive for all purposes of this Agreement. The Earn-Out Recipient may make inquiries of the Purchaser and its accountants and appropriate employees regarding questions concerning or disagreements with an Earn-Out Report arising in the course of their review thereof, and the Purchaser shall use reasonable efforts to cause any such employees and accountants to cooperate with and respond to such inquiries in a timely manner (subject to the Earn-Out Recipient entering into any confidentiality and other agreements reasonably required by the accountants). For purposes of this Section 1.3, Purchaser shall be deemed to have received the consolidated audited financial statements of Addus HomeCare as of the date that Addus HomeCare first files its Form 10-K, or any successor form, with the Securities and Exchange Commission for the relevant fiscal year, if Purchaser has not periodically received such financial statements. Objections to Earn-Out Report; Arbitrating Accountants . If the Earn-Out Recipient objects to the computation of EBITDA set forth in the Earn-Out Report by providing the appropriate notice in accordance with Section 1.3, the amount of EBITDA shall be determined by good faith negotiation between the Earn-Out Recipient and the Purchaser. If the Purchaser and the Earn-Out Recipient are unable to reach agreement within thirty (30) days after such notification, the determination of the amount of EBITDA for the period in question shall be submitted to an accounting firm as may be mutually agreed upon by the parties hereto (the “ Arbitrating Accountants ”), whose determination shall be (i) in writing, (ii) furnished to the Earn-Out Recipient and the Purchaser as soon as practicable (and in no event later than thirty (30) days after submission of the dispute to the

Arbitrating Accountants), (iii) made in accordance with the preparation of the Audited Financial Statements and (iv) nonappealable and incontestable by the Earn-Out Recipient, the Seller Representative, the Sellers, the Purchaser and each of their respective Affiliates and successors and assigns and not subject to collateral attack for any reason other than manifest error or fraud. The fees and expenses of the Arbitrating Accountants shall be allocated between the Earn-Out Recipient, on the one hand, and the Purchaser, on the other hand, in the same proportion that the aggregate amount of the disputed EBITDA amount submitted to the Arbitrating Accountants that is unsuccessfully disputed by the Earn-Out Recipient (as ultimately determined by the Arbitrating Accountants) bears to the total amount of such disputed EBITDA amount so submitted. Each of the Seller Representative, the Sellers, the Earn-Out Recipient and the Purchaser agrees to use its respective commercially reasonable efforts to cooperate with the Arbitrating Accountants and to cause the Arbitrating Accountants to resolve any dispute no later than thirty (30) days after submission of the dispute to the Arbitrating Accountants in accordance with this Agreement. Right of Set-Off; Effect of Subsequent Restatements of Audited Financial Statements .

(a) Subject to the provisions of (x) the Purchase Agreement (including Section 10.7 thereof) and (y) Section 1.6 of this Agreement, the Purchaser shall have the right to withhold and set-off against any amount due to the Earn-Out Recipient under this Agreement the amount of (i) the Repayment Amount (as defined below) or (ii) any Losses that the Earn-Out Recipient, the Seller Representative or any Seller may be required to pay to the Purchaser or its Affiliates, each of their respective officers, directors, employees, agents and representatives or each of the heirs, executors, successors and assigns of any of the foregoing (as applicable, the “ Indemnified Party ”) under Article X of the Purchase Agreement pursuant to any claim for indemnification made by the Indemnified Party on or prior to any Earn-Out Payment Date. If any Earn-Out Payment due under this Agreement is so set-off, the amount of such set-off shall be treated as an adjustment to the Purchase Price. In the event that any such outstanding claims for indemnification have not been finally determined in accordance with Article X of the Purchase Agreement on the respective Earn-Out Payment Date, the Purchaser shall have the right to withhold from the Earn-Out Payment due to the Earn-Out Recipient on such Earn-Out Payment Date the Indemnified Party’s reasonable estimate of the maximum amount of Losses that the Earn-Out Recipient, the Seller Representative or the Sellers would be obligated to pay the Indemnified Party with respect to such claim in accordance with Article X of the Purchase Agreement and, upon final resolution of such claim in accordance with Article X thereof, the claim shall be set-off against the amount so withheld and the remaining balance, if any, shall be paid to the Earn-Out Recipient or Seller, as applicable, within five (5) Business Days.

If the Purchaser elects to set-off pursuant to this Section 1.5(a), and the Earn-Out Recipient and/or the Sellers have a right to set-off under Section 10.7 of the Purchase Agreement, the Purchaser’s right to set off under this Agreement shall be reduced by the amount of such Earn-Out Recipient’s and/or Sellers’ set-off under the Purchase Agreement.

(b) Notwithstanding anything to the contrary contained in this Agreement (including, without limitation, Exhibit A ), to the extent that any of the Audited Financial Statements are subject to restatement by the Purchaser’s Auditor, and such restatement would result in the applicable EBITDA for the immediately preceding calendar year to be:

(c) The Purchaser shall notify the Earn-Out Recipient of any restated Audited Financial Statements subject to this Agreement within five (5) Business Days of the date of any public announcement by Purchaser of its intention to restate such Audited Financial Statements. If such restated Audited Financial Statements results in an adjustment to an Earn-Out Payment, Purchaser will deliver to the Earn-Out Recipient a copy of such restated Audited Financial Statements (and a copy of the consolidating financial statements applicable to the Purchaser) within five (5) Business Days after the date that Purchaser makes the restated Audited Financial Statements publicly available.

1.6 Earn-Out Payment Conditions and Limitations .

(a) No Obligor shall be obligated to pay or deliver, and the Earn-Out Recipient shall not be entitled to receive, any Earn-Out Payment in cash, property or securities, by set-off or otherwise, to the extent that payment or delivery of such Earn-Out Payment (i) would be prohibited or blocked by or result in a default, with the passage of time, giving of notice or both, under any contractual arrangement to which any Obligor or any of its Affiliates is a party, including, without limitation, due to a default or an Event of Default under the Financing Documents (or if such default or Event of Default would result from the payment or delivery of such Earn-Out Payment) or (ii) would cause the Obligors or their Affiliates not to be in pro forma compliance with the covenants contained in the Financing Documents after giving effect to the payment or delivery of such Earn-Out Payment; provided, however , that any portion of the Earn-Out Payment that is payable and not prohibited from being paid pursuant to clauses (i) or (ii) of the preceding sentence shall be paid, notwithstanding clauses (i) or (ii).

(b) No Obligor shall be obligated to pay or deliver, and the Earn-Out Recipient shall not be entitled to receive, any Earn-Out Payment in cash, property or securities, by set-off or otherwise (i) if making such Earn-Out Payment would cause or make it likely that the Purchaser or any of its Affiliates would become the subject of a federal or state insolvency or bankruptcy proceeding or would otherwise cause any Obligor or any of its Affiliates to become insolvent, as determined by the Purchaser’s board of directors in its sole discretion, (ii) if immediately after giving effect to such Earn-Out Payment, the Obligors and their Affiliates (taken as a whole) would not be able to pay their respective debts as they become due and would not own property which has a fair saleable value greater than the amounts required to pay their respective debts (including a reasonable estimate of the amount of all contingent liabilities) or (iii) if immediately after giving effect to such Earn-Out Payment, the Obligors and their Affiliates (taken as a whole) would not have adequate capital available to carry on their respective businesses. Subject to Section 1.6(a), the Purchaser’s obligations to make such Earn-Out Payment shall be reinstated once such condition in clauses (i), (ii) or (iii) of the preceding sentence is no longer applicable. For purposes of clarification, any portion of the Earn-Out Payment that is payable and not prohibited from being paid pursuant to clauses (i), (ii) or (iii) of the preceding sentence shall be paid, notwithstanding clauses (i), (ii) or (iii).

(c) In the event of the inability or failure of Purchaser to make any payment, to the extent payable, to the Earn-Out Recipient within thirty (30) days following the First Earn-Out Payment Date or Second Earn-Out Payment Date, as applicable, then interest shall accrue on the amount due and not paid at the rate of ten percent (10%), per annum compounded annually from the date such payment is due until paid in full.

(d) The Purchaser shall not merge, recapitalize or consolidate with any affiliate or any third party, or sell or lease any material assets of the Purchaser, prior to one (1) business day following the Second Earn-Out Payment Date without the prior written consent of the Earn-Out Recipient, which consent shall not be unreasonably withheld or delayed.

(e) For the avoidance of doubt, it is agreed that any Earn-Out Payment, to the extent payable (including any portion thereof), blocked pursuant to the terms hereof shall accrue and shall be paid promptly after (A) such default(s) or Event of Default(s) resulting in the prohibition of such Earn-Out Payment is(are) no longer is existence and/or the Obligors and their Affiliates achieve pro forma compliance with the covenants contained in the Financing Documents after giving effect to the payment of any such Earn-Out Payment and (B) no default or Event of Default under the Financing Documents would result from the payment of any such Earn-Out Payment.

1.7 Additional Purchase Price . Any Earn-Out Payment paid or delivered to the Earn-Out Recipient will be treated by the parties as additional Purchase Price under the Purchase Agreement. Further, if any Earn-Out Payment due under this Agreement is set-off in accordance with Section 1.5(a), the amount of such set-off shall be treated as an adjustment to the Purchase Price.