Structuring Earn-Out Provisions in New Hampshire M&A Transactions to Maximize Seller Value
An earn-out provision allows a New Hampshire business seller to receive additional post-closing payments based on the company's future performance. To protect this payout, the contract must strictly define financial metrics and guarantee the seller's operational control.
When selling a business in New Hampshire, buyers and sellers often disagree on the company's true value. A buyer might hesitate to pay top dollar if they believe the seller's future growth projections are too optimistic. To bridge this valuation gap, M&A attorneys frequently use an 'earn-out' provision. An earn-out dictates that the seller will receive a portion of the purchase price upfront at closing, with additional contingent payments paid over the next one to three years if the business hits specific financial milestones.
While earn-outs can maximize a seller's total payout, they are notorious for causing post-closing litigation. If a buyer takes over the company and intentionally runs it poorly or manipulates the accounting, the seller may never see their earn-out money. If you are negotiating the sale of your business, it is critical to find a skilled M&A lawyer in our US Lawyers directory to draft ironclad earn-out protections into your Purchase Agreement.
Key Strategies for Structuring Earn-Outs in NH
Whether your company is a manufacturing plant in Nashua or a tech startup in Portsmouth, the rules of contract law apply equally. Structuring the earn-out correctly requires precision in both finance and legal drafting.
Tying Earn-Outs to EBITDA Targets
The most common metric used for an earn-out is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). However, 'EBITDA' is not a universally standardized accounting term under GAAP (Generally Accepted Accounting Principles). Buyers can easily manipulate EBITDA by suddenly increasing executive salaries, heavily investing in new marketing campaigns, or charging the subsidiary massive 'management fees' from the parent company, all of which lower the earnings and erase the seller's earn-out.
To prevent this, the definitive agreement must contain highly specific adjustments. Your attorney must explicitly state that post-closing EBITDA will be calculated excluding any new corporate overhead allocations from the buyer, and excluding the costs of any new capital expenditures that the seller did not approve.
Protecting the Seller's Post-Closing Operational Control
If your earn-out depends on the business hitting sales targets over the next two years, you need the authority to actually hit those targets. Often, sellers agree to stay on as a CEO or general manager during the earn-out period. However, if the buyer slashes your marketing budget or fires your top salespeople, you will fail. The M&A contract should include strict covenants requiring the buyer to operate the business 'in the ordinary course' and providing the seller with veto power over major budget cuts or strategic shifts during the earn-out period. Without these clauses, you are at the buyer's mercy.
Preventing Accounting Manipulation Under NH Contract Law
New Hampshire law heavily enforces the implied covenant of good faith and fair dealing in commercial contracts. In the landmark New Hampshire case Centronics Corp. v. Genicom Corp., 132 N.H. 133 (NH Supreme Court 1989), the court established that parties have an obligation to act in good faith, especially when a contract gives one party discretion over the other's compensation. Furthermore, under the N.H. Rev. Stat. Ann. § 382-A:1-304, buyers cannot actively sabotage a seller's ability to achieve their earn-out. If a buyer in Concord deliberately shifts profitable contracts to a different subsidiary to starve the acquired company of revenue, the seller has strong grounds to file a lawsuit in the New Hampshire Superior Court, Business and Commercial Dispute Docket, Concord.
How Much Does Structuring an Earn-Out Cost?
Drafting a robust earn-out is a complex specialized skill, and it adds to the overall legal fees of the M&A transaction.
- M&A Attorney Fees: Negotiating the financial definitions and protective covenants of an earn-out usually requires an additional 15 to 30 hours of legal work, translating to roughly $7,500 to $15,000 in extra legal fees.
- CPA / Valuation Expert Fees: Having an accountant model out the earn-out scenarios and define the EBITDA adjustments typically costs $5,000 to $10,000.
- Litigation Costs: If the buyer refuses to pay the earn-out post-closing, filing a breach of contract lawsuit in New Hampshire Superior Court can easily cost a seller $50,000 to $150,000+, emphasizing the need to draft it right the first time.
How Long is a Typical Earn-Out Period?
In most New Hampshire mid-market transactions, the earn-out period lasts between 12 and 36 months after the closing date. Anything shorter than a year rarely provides an accurate picture of sustainable business growth, and anything longer than three years ties the seller to the buyer for too long, increasing the risk of disputes over long-term strategic changes.
Frequently Asked Questions (FAQ)
What happens if the buyer sells the company before my earn-out is paid?
Your contract must include an 'acceleration clause.' This legally mandates that if the buyer acquires your company and then flips it or sells it to someone else during your earn-out period, the maximum potential earn-out payout becomes immediately due and payable to you in full.
Should the earn-out be tied to gross revenue instead of profit?
For sellers, tying the earn-out to top-line gross revenue is generally much safer than EBITDA. Revenue is straightforward and much harder for a buyer's accountants to manipulate, whereas profit (EBITDA) can be artificially lowered by increasing expenses.
Can the buyer offset the earn-out if there is an indemnification claim?
Buyers will often try to include a 'right of setoff,' meaning if you breached a warranty in the contract (e.g., undisclosed lawsuit), they can deduct their damages directly from your earn-out check. Sellers should vigorously negotiate to limit or remove this right of setoff.
Who calculates whether the earn-out target was met?
Typically, the buyer prepares the initial earn-out statement. The seller then has a specific window (usually 30 days) to review the math and object. If there is a dispute, the contract should require the parties to hire a neutral, independent accounting firm to make the final, binding determination.
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