What is Clawback Provision?
The Short Answer
Clawback Provision explained simply
A clawback provision is a clause in a sales agreement. It lets the buyer get back some of the purchase price from the seller. This happens if the business does not perform as expected after the sale. It protects the buyer from overpaying based on future projections that don’t come true. It also motivates the seller to ensure a smooth transition and continued success.
Real-World Example
The Software Startup Clawback
Imagine a software company is sold for $10 million. The buyer agrees to pay $8 million upfront and $2 million later. This $2 million is subject to a clawback provision. The provision states that if the company’s recurring revenue does not grow by 20% in the first year after the sale, the buyer can claw back $500,000 from the seller. If the revenue growth target is missed, the buyer gets $500,000 back from the seller.
Why this matters
Clawback provisions are important for both buyers and sellers. For buyers, they offer protection against inflated valuations and ensure the seller has an incentive to help the business succeed post-sale. For sellers, understanding these provisions is key to negotiating a fair deal and avoiding future financial surprises. It ensures that the seller is accountable for the business’s performance after the sale.
Always understand the specific triggers and amounts in a clawback provision. They can significantly impact the final sale price and your post-sale obligations.
Always understand the specific triggers and amounts in a clawback provision. They can significantly impact the final sale price and your post-sale obligations.
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