We agreed to a three-year earnout representing fifteen percent of our transaction value. What happens to our deferred earnout if the buyer sells the combined business to another private equity firm or defaults before our term expires?

Question

Tyler Smith · Accepted Answer

If your purchase agreement is silent on future corporate restructuring, a secondary sale or recapitalization can completely destroy your earnout. When a buyer sells to another platform, your operational milestones get buried inside a larger corporate entity, rendering original accounting benchmarks unmeasurable.

You must insist on a comprehensive change of control acceleration clause within the earnout agreement. This provision mandates that if the acquiring company undergoes a change of control, merges, sells more than fifty percent of its assets, or recapitalizes with a new financial sponsor before the earnout term concludes, the earnout is deemed fully achieved and accelerates immediately for payout at closing.

In addition to change of control protection, you need explicit solvency and operational covenants. If the buyer defaults on their senior credit facility or enters restructuring, your earnout claim ranks behind secured lenders as a general unsecured liability. Require covenants that restrict the buyer from stripping assets, loading the operating company with excessive cross-collateralized parent debt, or reallocating administrative overhead into your operating division. Without these explicit legal protections, your deferred consideration is effectively an interest-free gift to the buyer.