Earn-Out Agreement Template

EARN-OUT AGREEMENT

This Earn-Out Agreement (the "Agreement") is made effective as of the day of , , by and between Purchaser Name: , a organized under the laws of (hereinafter "Purchaser"), and Seller Name: , a organized under the laws of (hereinafter "Seller").

RECITALS

WHEREAS, Purchaser and Seller have entered into a definitive agreement for the acquisition by Purchaser of all issued and outstanding equity or assets of the business operated by Seller (the "Acquisition"); and

WHEREAS, the parties desire that a portion of the purchase price be payable contingent upon the achievement of specified post-closing performance targets over the Earn-Out Period, subject to the terms and conditions set forth in this Agreement; and

WHEREAS, Seller and Purchaser desire to set forth the computation, payment, and other terms applicable to the earn-out consideration.

NOW, THEREFORE

In consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. DEFINITIONS

For purposes of this Agreement, the following terms shall have the meanings set forth below:

"Earn-Out Period" means the period commencing on and ending on .

"Earn-Out Target" means the performance metric specified in Section 2, expressed as for each Earn-Out Period.

"Maximum Earn-Out" means the aggregate maximum amount payable to Seller under this Agreement, equal to $.

2. PURCHASE PRICE AND EARN-OUT CONSIDERATION

In addition to the base purchase price paid at closing pursuant to the Acquisition, Purchaser shall pay Seller contingent earn-out payments (the "Earn-Out Payments") in accordance with the terms of this Agreement. Earn-Out Payments shall be calculated by reference to the Earn-Out Target, computed for each applicable measurement period, as set forth in this Section.

The Earn-Out Target for each Measurement Period shall be $ of . If the actual performance for a Measurement Period exceeds the Earn-Out Target, Seller shall be entitled to an Earn-Out Payment equal to % of the amount by which actual performance exceeds the Earn-Out Target, subject to the Maximum Earn-Out.

3. CALCULATION, PAYMENT AND TIMING

3.1 Measurement Periods. The Earn-Out shall be measured and paid on the following schedule: during the Earn-Out Period. Each Measurement Period shall end on the last day of the applicable quarter or year as specified above.

3.2 Calculation. Within days after the end of each Measurement Period, Purchaser shall deliver to Seller a written statement setting forth in reasonable detail the computation of the Earn-Out Payment for such Measurement Period (the "Calculation Statement"), including supporting schedules and reconciliations.

3.3 Payment. Subject to Section 5 (Setoffs and Adjustments), Purchaser shall pay any undisputed Earn-Out Payment within days after delivery of the Calculation Statement. Payments shall be made in United States dollars by wire transfer to an account designated in writing by Seller.

4. REPORTING AND AUDIT RIGHTS

Seller shall have the right, during normal business hours and upon reasonable prior notice not less than days, to inspect and audit the books, records and supporting documentation of Purchaser solely to verify the Calculation Statement. Any such audit shall be conducted at Seller's expense unless it demonstrates an error in Purchaser's Calculation Statement resulting in an underpayment of more than %, in which case Purchaser shall reimburse Seller for the reasonable costs of the audit.

5. ADJUSTMENTS; WITHHOLDING

All Earn-Out Payments shall be subject to customary setoffs and adjustments for refunds, chargebacks, returns, and accounting errors. Purchaser may withhold from any Earn-Out Payment such amounts as are required by applicable law or reasonably required to satisfy claims under the Acquisition agreement or for taxes, withholdings, or other governmental charges.

Tax treatment of the Earn-Out Payments shall be determined by the parties in accordance with applicable law. The parties agree to cooperate in good faith to determine and effectuate proper tax treatment and to provide each other with tax forms reasonably requested.

6. REPRESENTATIONS AND WARRANTIES

6.1 Seller Representations. Seller represents and warrants to Purchaser that: (a) Seller has full corporate or individual power and authority to enter into this Agreement and to perform its obligations hereunder; (b) the execution and delivery of this Agreement by Seller and the performance of Seller's obligations will not violate any material agreement or law applicable to Seller; and (c) the calculations or records provided by Seller to Purchaser in connection with any dispute will be true, complete and prepared in good faith.

6.2 Purchaser Representations. Purchaser represents and warrants to Seller that: (a) Purchaser has full power and authority to enter into this Agreement; (b) this Agreement is a valid and binding obligation of Purchaser enforceable in accordance with its terms; and (c) Purchaser will maintain books and records in accordance with generally accepted accounting principles consistently applied.

7. COVENANTS

During the Earn-Out Period, Purchaser covenants that it will (i) operate the Business in the ordinary course consistent with past practice, (ii) use commercially reasonable efforts to preserve the goodwill and relationships of the Business, and (iii) not take any action that would intentionally reduce the ability of the Business to achieve the Earn-Out Target. Any material deviation from these covenants that adversely affects the calculation of the Earn-Out shall entitle Seller to equitable relief and adjustments to the Earn-Out calculation.

8. INDEMNIFICATION

Each party shall indemnify, defend and hold harmless the other party from and against any losses, claims, damages or liabilities arising out of any breach of its representations, warranties or covenants under this Agreement, subject to any limitations and procedures set forth in the Acquisition agreement.

9. CONFIDENTIALITY

Each party acknowledges that the Calculation Statements, supporting documentation, and other information exchanged under this Agreement constitute confidential information of the disclosing party. Such information shall be used solely for purposes of administering this Agreement and shall not be disclosed except as required by law or with the prior written consent of the disclosing party.

10. DISPUTE RESOLUTION

In the event of any dispute regarding the Calculation Statement, the parties shall first attempt in good faith to resolve the dispute by negotiation among senior representatives. If the dispute is not resolved within days, the dispute shall be submitted to binding arbitration administered by a single arbitrator under the rules agreed by the parties. The arbitrator shall be instructed to apply the terms of this Agreement and shall issue a written decision. Judgment upon the award may be entered in any court of competent jurisdiction.

11. MISCELLANEOUS

11.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of , without regard to its conflict of laws principles.

11.2 Entire Agreement. This Agreement, together with the Acquisition agreement, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, relating to the Earn-Out.

11.3 Severability. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not affect the remaining provisions, and the parties shall negotiate in good faith to replace the invalid or unenforceable provision with a valid and enforceable provision that achieves, to the maximum extent possible, the economic, business and other purposes of the invalid or unenforceable provision.

11.4 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally, by certified mail (return receipt requested), or by overnight courier to the addresses set forth below or to such other address as a party may specify in writing:

11.5 Amendments; Waiver. No amendment, modification or waiver of any provision of this Agreement shall be effective unless made in writing and signed by both parties. No failure or delay by either party in exercising any right shall operate as a waiver of that right.

11.6 Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party, except that Purchaser may assign this Agreement to an affiliate or in connection with a merger or sale of substantially all of Purchaser's assets, provided that such assignee assumes Purchaser's obligations hereunder.

11.7 Survival. The representations, warranties, covenants, indemnities and obligations of the parties contained in this Agreement that by their nature are intended to survive the Closing shall survive the Closing for the periods set forth herein or in the Acquisition agreement.

11.8 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Signatures transmitted by electronic means shall be effective as originals.

EXECUTION

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.

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