The Deal Terms That Determine What You Actually Take Home
The purchase price in an M&A deal is never as simple as a single number. Between earnout provisions, escrow holdbacks, working capital adjustments, and indemnification claims, the gap between the headline price and what the seller actually receives can be significant — sometimes dramatically so. John Montague has negotiated these post-closing mechanisms across hundreds of transactions over more than fifteen years, with a concentration in technology company M&A where earnout structures are particularly common and particularly contentious. His background at Locke Lord LLP, an AM Law 200 firm where he focused on M&A and private equity transactions, gave him early exposure to sophisticated deal structures that most attorneys encounter only later in their careers.
From John Montague: I’ve seen earnouts described as a bridge between what the buyer wants to pay and what the seller wants to receive. That’s a nice theory. In practice, earnouts are a source of post-closing disputes more often than any other deal term. If you’re going to agree to one, the measurement mechanics, the seller’s ability to influence results, and the dispute resolution process all need to be bulletproof.
How We Help
Montague Law’s practice in this area covers the full lifecycle of contingent and deferred purchase price mechanisms. John Montague advises clients on structuring earnout provisions with clear, measurable milestones and accounting methodologies that minimize ambiguity; negotiating escrow terms including holdback amounts, release schedules, and the mechanics of indemnification claims against escrow funds; drafting working capital adjustment provisions with defined methodologies for calculating closing-date working capital and resolving disputes; advising on purchase price adjustment mechanisms tied to financial performance, customer retention, or product development milestones; representing clients in post-closing disputes over earnout payments, escrow releases, and indemnification claims; and coordinating with forensic accountants and financial advisors when post-closing adjustment disputes require expert analysis.
Why These Terms Deserve More Attention Than They Get
Most of the attention in an M&A negotiation focuses on the headline purchase price. That’s understandable — it’s the number that gets announced. But the real economics of a deal often depend on the mechanics that sit below that headline: How much of the price is held in escrow, and for how long? What triggers an indemnification claim? How is “adjusted EBITDA” defined for earnout purposes? Who controls the business during the earnout period?
These aren’t minor drafting points — they’re the provisions that determine whether a seller actually receives the price they thought they negotiated. John Montague’s accounting degree from Stetson University gives him a particular advantage in this area: he can engage directly with the financial modeling behind working capital pegs, EBITDA adjustments, and earnout calculations, rather than relying solely on the client’s accountants to flag structural issues.
In technology M&A transactions, earnouts are especially common because the target company’s value often depends on future product development, customer adoption, or revenue growth that hasn’t yet materialized. This creates inherent tension between the buyer (who controls the business post-closing) and the seller (whose payout depends on performance metrics they can no longer directly control). Structuring these arrangements to protect the seller’s interests while remaining commercially reasonable requires experience with both the legal frameworks and the business realities of technology companies.
Frequently Asked Questions
What is an earnout in an M&A transaction?
An earnout is a contingent payment mechanism where a portion of the purchase price is paid only if the acquired business achieves specified performance targets after closing. Earnouts are common in technology M&A where the buyer and seller disagree on valuation or where significant value depends on future milestones. They can be tied to revenue, EBITDA, customer metrics, product launches, or other measurable outcomes.
How much of the purchase price is typically held in escrow?
Escrow holdbacks in small to mid-market M&A transactions typically range from 5% to 15% of the purchase price, held for 12 to 24 months after closing. The escrow serves as a source of funds for the buyer’s indemnification claims if the seller’s representations and warranties turn out to be inaccurate. The specific amount and duration depend on the deal’s risk profile, the scope of the seller’s representations, and the negotiating leverage of each party.
What are working capital adjustments?
Working capital adjustments are purchase price mechanisms designed to ensure the business has a “normal” level of operating capital at closing. The parties agree on a target working capital amount, and the actual working capital is measured at closing. If it’s above the target, the seller receives an upward adjustment; if below, the buyer receives a downward adjustment. Defining the methodology clearly in the purchase agreement is critical to avoiding post-closing disputes.
About John Montague
John Montague is an M&A and technology transactions attorney whose accounting background from Stetson University gives him distinctive strength in negotiating financial deal terms. A graduate of the University of Florida Levin College of Law, John has spent over fifteen years advising on M&A transactions, including at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm. He practices from offices in Fernandina Beach and Coral Gables, Florida.
Related Practice Areas: Mergers & Acquisitions | M&A Due Diligence | Asset Purchases vs. Stock Purchases
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