Earnouts as serious documents.

Most LOIs put the earnout in a single paragraph. Most earnouts are the second-most-litigated provision in M&A. The math is bad.

A three-line earnout that survives the LOI becomes a six-page earnout in the purchase agreement, with every line negotiated under pressure in the last two weeks before close.

Better: spend ninety minutes at LOI defining the earnout metric, the measurement period, the dispute mechanism, and the acceleration triggers. The same four definitions in the LOI become the same four definitions in the SPA. The drafting compresses from six pages to two.

The metric. Most earnouts get tied to revenue because revenue is the simplest number to measure. That is also why most earnouts get litigated. Revenue is the easiest number for the buyer to manipulate. Tie the earnout to gross profit or contribution margin instead.

Define the metric in the LOI with the exact accounting standard: "Earnout shall be measured by [metric] calculated in accordance with US GAAP, consistent with the historical methodology used in [the company's audited financials / the QofE report]."

The measurement period. Cap the earnout window at 24 months. Anything longer is a litigation risk.

The dispute mechanism. This is the single most important provision in an earnout, and the one most LOIs ignore. The dispute mechanism should specify:

(a) Who calculates the earnout. Default to the buyer's accountants, with the calculation delivered to the seller within 60 days of the end of the measurement period. (b) The seller's review period. Typically 30 days from receipt. (c) The dispute resolution path. A neutral accounting firm (selected from a pre-named list of three firms in the LOI) reviews disputed items only. Their decision is binding. (d) The cost allocation. Buyer pays if the calculation is materially wrong (defined as more than 5 percent off). Seller pays if substantially right. Split if in between. (e) The dispute timeline. 90 days from the seller's notice to a final resolution.

The acceleration triggers. The earnout should accelerate to its target value on three triggers:

(a) Change of control of the platform within the measurement period. (b) Material adverse buyer-driven operational change. (c) Bankruptcy or insolvency of the platform.

If the earnout could be measured by a teenager with a spreadsheet, you wrote it well.