Earnout Agreement Template for England and Wales

An earnout agreement is a crucial legal document in merger and acquisition transactions that bridges the gap between seller expectations and buyer valuations. Under England and Wales law, this agreement allows you to defer part of the purchase price based on the target company's future performance, providing protection for both parties when there's uncertainty about the business's prospects.

When do you need this document?

You'll need an earnout agreement when acquiring a business where there's significant disagreement about valuation or uncertainty about future performance. This commonly occurs in technology acquisitions where revenue projections are speculative, seasonal businesses with fluctuating performance, or when key management personnel are essential to ongoing success. The agreement is also valuable when the target company has recently launched new products or entered new markets, making historical performance data less reliable for valuation purposes. Additionally, earnout provisions are often necessary when the seller has superior knowledge about the business's potential or when retaining the seller's involvement is crucial for transition success.

Key legal considerations

The earnout calculation methodology must be precisely defined to avoid disputes, including specific financial metrics, accounting standards, and measurement periods. You need to address potential conflicts between maximising earnout payments and operating the business in the buyer's best interests post-acquisition. Management and control provisions are critical, particularly regarding the seller's ongoing involvement and the buyer's operational decisions that might affect earnout targets. Payment terms should specify timing, currency, and any adjustments for working capital changes or extraordinary items. Dispute resolution mechanisms must be clearly established, including expert determination procedures for accounting disagreements and arbitration for broader disputes.

Legal requirements in England and Wales

Under the Companies Act 2006, share transfers and corporate restructuring elements must comply with statutory requirements for board resolutions and shareholder approvals. The Law of Property (Miscellaneous Provisions) Act 1989 governs contract formation and execution requirements, ensuring the agreement is properly executed as a deed if necessary. Financial Services and Markets Act 2000 compliance may be required if earnout payments constitute regulated financial activities or promotions. Corporation Tax Act 2009 and Income Tax Act 2007 implications must be considered for both corporate and personal tax treatment of earnout payments. Employment Rights Act 1996 requirements apply when earnout provisions are linked to key personnel retention or performance. The agreement should include appropriate warranties, indemnities, and limitation clauses to comply with English contract law principles and protect both parties' interests throughout the earnout period.