A Tale of Two Earnouts
We spotted a pair of recent SMB/lower-middle market deals in the news. Both had useful nuggets buried in their earnout clauses.
The first: AirJoule Technologies Corporation acquired Bitsink LLC, a manufacturer of cooling, power distribution and racking infrastructure for AI and high-density data centers. Bitsink was paid $18M in upfront cash (subject to adjustment/holdback) as well as $9M in Buyer's NASDAQ-listed common stock. Further, Buyer agreed to issue up to a maximum of $40M in additional stock over a 3-year earnout. With only 40% of proceeds paid at closing, there is extraordinary weight on the earnout.
Buyer disclosed that Seller's revenues were $11M across 2024-25 (combined). On those figures, the $27M in upfront proceeds implies an approximately 5x revenue multiple (average), assuming similar 1H 2026 numbers. Perhaps more interesting is that the earnout targets are revenue-based, where Year 1 requires approx. $30M to hit the maximum earnout ($20M) and Year 2 requires approx. $63M to receive the 2nd tranche ($20M), with a 3rd earnout year for catch-up. Those are lofty targets. Buyer also reported that Seller headed into closing with $15 million in near-term purchase orders.
For Seller, you have to applaud the chance at $67M in total proceeds (max) on pre-closing revenues averaging $6M/yr or less. Yet, the structure points to numerous warning signs, such as a low cash-to-stock mix, which is especially concerning given Buyer's profile (recent SPAC). When focusing on the earnout, again you would applaud Seller's negotiation of a revenue-based set of targets rather than murky EBITDA or margin targets that incentivize Buyer to pull on certain levers. Yet, are those targets set unrealistically high? Further, the earnout covenants restrict Buyer's ability to sell the business before the end of the earnout and prohibit it from materially impairing the Target's ability to achieve its earnout. However, it would have been nice to see more guardrails around Buyer's ability to control the employees, clients and post-closing operations.
A second deal, US-based Taboola’s impending acquisition of UK-based adtech firm Dianomi for £19M (~$25M), was noteworthy for its use of a non-financial based earnout structure. Although the deal is not expected to close until late 2026, Morningstar reported that the contingent consideration depends on Dianomi's publishing clients agreeing to incorporate some provisions of Taboola's standard terms into their agreements. All told, Seller could receive a further £8M in post-closing earnout (£27M max).
With any non-financial based earnout target (e.g., signing ### new clients, or getting into XYZ new stores), it is especially important (and challenging) to make sure that the purchase agreement precisely describes the target. Vague language, in my experience, favors Buyers. You are gifting them wiggle room to say that the target hasn't been achieved.
Keith Bova -