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← Series 79: M&A, Tender Offers & Restructuring
Series 79 practice questioneasyEarnouts

An earnout provision in an acquisition agreement provides for:

  1. AContingent payment for post-closing target performance✓ Correct answer
  2. BGuaranteed minimum returns to the target's shareholders
  3. CAccelerated payment of the full purchase price
  4. DA reduction in the purchase price if the acquirer's stock declines
Explanation

Why A — Contingent payment for post-closing target performance

An earnout is a contingent payment mechanism where additional consideration is paid to the seller if the acquired business meets agreed-upon performance milestones (such as revenue or EBITDA targets) during a specified post-closing period. Earnouts help bridge valuation gaps between buyers and sellers by tying a portion of the purchase price to the actual future performance of the business. They are commonly used in acquisitions of growth-stage companies where future performance is uncertain.

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