The buyer is proposing an earnout with strict annual targets where if we miss Year One, we lose that year's payout forever, even if we crush the cumulative three-year target. How do we negotiate a cumulative catch-up provision or look-back mechanism to protect our total earnout potential?

Question

Tyler Smith · Accepted Answer

Annual earnout targets with no catch-up provision are designed to help the buyer keep your money. Business growth is rarely linear, especially during a post-close integration. A supply chain hiccup, a delayed product launch, or a simple transition delay in Year One can easily cause you to miss your target, costing you millions even if you double your targets in Years Two and Three. To prevent this, you must insist on a cumulative catch-up provision, also known as a look-back mechanism. This structure evaluates your performance over the entire earnout period rather than in isolated annual silos. For example, if your earnout pays out one million dollars per year based on achieving five million dollars in annual revenue, structure the agreement so that if you miss the Year One target but hit a cumulative ten million dollars by the end of Year Two, you are retroactively paid the full Year One milestone. Another approach is to base the entire earnout on a single, cumulative three-year metric, with annual prepayments. If you hit the cumulative target at the end of the term, any missed annual payouts are fully caught up. This aligns both parties toward long-term value creation and prevents the buyer from gaming the system by artificially shifting revenue between quarters to avoid paying you.