Delaware Case Exemplifies Typical Weaknesses In Earnout Provisions

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Earnout provisions are often utilized when a buyer and seller disagree on valuation. A portion of the purchase price is contingent upon certain financial milestones during a specified period of time after closing of the transaction. Earnout provisions reward the seller if its projections about the future financial performance of the business are accurate, while they protect a buyer from overpaying if the projections are not. Earnout provisions seem to embody a fair compromise between buyer and seller, yet these structures often end up triggering conflicts and, in some cases, litigation.

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