Simple English definitions for legal terms
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An earnout agreement is a type of business sale where the buyer pays a portion of the price upfront and the rest is based on how well the business does in the future. The seller usually stays involved in managing the business for a while after the sale. It's like a bet on the business's success!
An earnout agreement is a type of agreement used in the sale of a business. In this agreement, the buyer pays an initial amount upfront, but the final purchase price is determined by the business's future profits. The seller may also help manage the business for a period after the sale.
Let's say that John wants to sell his small business to Jane. They agree on a purchase price of $500,000, but they also include an earnout agreement. The earnout agreement states that Jane will pay John an additional $50,000 if the business's profits increase by 10% in the next year. John agrees to help manage the business for the next year to ensure its success.
In this example, the earnout agreement allows Jane to pay a lower upfront cost for the business, while also incentivizing John to help ensure the business's success in the future.