Buyer claims that earnout is based upon the post-closing net sales of seller’s small box chassis products. The seller claims that earnout includes net sales of small box chassis products acquired by buyer from other sellers.
M&A Stories
September 20, 2022
Introduction
Earnout provisions often lead to legal battles, and this case is no exception. In this blog, we discuss a recent dispute between a buyer and a seller regarding the interpretation of “net sales” in a $1.7 million earnout agreement.
The Deal
In this particular deal, a public company purchased the assets of a Colorado-based manufacturer specializing in small box chassis products. These products are used by other companies for integration into larger products or by aftermarket companies to create customized and high-performance items. The purchase price consisted of $3.1 million in cash and an estimated $1.7 million based on the net sales “attributable to the small box chassis product line sold by Buyer and any affiliate from and after Closing…”
The Lawsuit
A disagreement arose between the buyer and seller regarding which products were included in the earnout agreement. The buyer argued that the earnout should only apply to the sales of the seller’s own products. However, the buyer had also sold small box chassis products acquired from other sellers.
The seller, on the other hand, claimed that the earnout should include sales of all small box chassis products, including those acquired by the buyer from other sellers. The seller argued that the buyer had initially tried to limit the earnout to their product line in the purchase agreement, but the seller did not agree to this limitation.
The buyer attempted to resolve the matter through summary judgment, but the court rejected their request. The court stated that the dispute centered on the parties’ intent, as reflected in the draft agreements, and thus required witness testimony at trial for a resolution.
See Oreo Ventures, Inc. v. Rb Distribution, Inc., Civil Action No. 20-cv-02456-NYW-KLM United States District Court, D. Colorado, (September 13, 2022).
Conclusion
Based on the language of the earnout provision in the purchase agreement, it seems that the seller has a stronger argument. If the buyer’s proposed limitation had been accepted, this costly and time-consuming litigation could have been avoided.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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