Earnouts fail in the finance system more often than they fail in the term sheet. The term sheet says “revenue of the Taiwan business.” The ERP says revenue is booked in a Singapore entity after a transfer-pricing adjustment. Someone will argue in good faith. M&A Advisory Consulting that ignores the close calendar is just poetry.
Start with a metric the controller already produces. If the plant’s bonus already runs on output tonnes of a specified grade, that is a better earnout base than “contribution margin” invented for the SPA. Invented margins require a new report, a new argument about allocations, and a new opportunity for the seller-operator to optimise the wrong thing.
Write the exceptions before closing, not after the first miss. Related-party sales, one-off tooling, and pass-through materials should be in or out on day one. In Earnout Mechanics for Operating Metrics we make students list ten exceptions and then delete seven. The remaining three should be testable with invoices, not with a philosophy of fairness.
Governance matters as much as the formula. Who can change a product mix that moves the metric? If the buyer’s group sales team can divert orders after close, the earnout is a gift to whoever controls the funnel. If the seller stays as GM and can dump inventory into a distributor, the metric is a gift the other way. Name the people. Name the veto.
Counsel will still draft the clause. Your briefing should tell them which report, which entity, which grade, and which three exceptions. If you cannot, you are not ready to put an earnout in the IC pack, however fashionable it looks in a cross-border auction.