Purchase Agreement: Earn-Out with EBITDA Targets

by Practical Law Corporate & Securities

This Standard Clause provides for contingent earn-out payments payable to the seller in a private M&A transaction if the target company or business achieves specified annual EBITDA targets. Designed for use in a stock purchase, asset purchase, or merger agreement, this Standard Clause is drafted from the buyer's perspective while noting key negotiating points for the seller. It addresses the essential components of an earn-out, including the definition and calculation of Adjusted EBITDA, procedures for determining and disputing payments, and a dispute resolution process involving an independent accountant. The clause also explores crucial post-closing operational considerations, such as the buyer's discretion in running the business and the implied covenant of good faith. Additionally, it covers provisions for payment acceleration, a buyer's buyout option, and the right of set-off against indemnification claims. Reflecting current market practice, this Standard Clause incorporates and discusses recent trends and data from the ABA's Private Target Mergers & Acquisitions Deal Point Study.