The Business Sale With an EarnoutThe Business Sale With an Earnout

The negative impact of the COVID-19 pandemic has exacerbated the risk of using only a fixed price for the sale of a business. Many businesses have experienced a significant reduction in revenue that reduced their current values. Therefore, in the COVID-19 era, the gap between a seller’s asking price and the price a buyer is willing to pay is likely to be more pronounced than ever before. The seller typically feels that the business will return to its pre-COVID value in the short run, while the buyer typically feels that it may take far longer or that revenues may never return to pre-COVID levels. 

When a buyer and a seller can’t agree on the value of a business, the use of an earnout formula is a practical solution. Typically, the parties...