In an acquisition, the difference between a claw back and an earn-out lies in their mechanisms and outcomes:

Clawback

A clawback provision allows the buyer to receive a portion of the purchase price back in specific circumstances, often related to negative triggers like breaches of contract or other specified events.

The amount subject to clawback may be held in escrow, with only a portion of the total amount being held in this manner.

Clawbacks are typically used to protect buyers by allowing them to reclaim part of the purchase price if certain negative events occur post-acquisition.

‍Earn-Out

An earn-out involves a buyer potentially paying more in the future if certain milestones or performance targets are met by the acquired business or assets.

Earn-outs are structured based on financial, business, or other performance criteria, with payments varying based on the achievement of specific milestones or targets.

Unlike clawbacks that involve returning money, earn-outs are additional payments made by the buyer to the seller based on predefined performance metrics.

April 22, 2024