In March 2025, PepsiCo agreed to acquire Poppi, the prebiotic soda brand founded by Allison and Stephen Ellsworth, for $1.95 billion, plus a $300 million earnout payable only if the brand hits undisclosed performance milestones by the third quarter of 2027. PepsiCo now values that payment at about $12 million.

Earnouts appeared in about 24 percent of private-target deals outside the life sciences sector in 2025, yet sellers ultimately collect only about one in five potential earnout dollars. The Poppi measurement period is still open, and nothing suggests PepsiCo has failed to honor its obligations. But the deal illustrates where sellers are exposed and which contract terms protect them.

What PepsiCo’s Filings Show

Accounting rules require PepsiCo to remeasure the earnout at fair value every quarter. It does so using a random sampling simulation (sometimes called the Monte Carlo method) based on its own forecasts of Poppi’s net revenue and margin. That estimate has fallen from $278 million at the end of 2025 to $162 million in March, $117 million in June, and $12 million in September 2026. PepsiCo reports that Poppi’s sales volume grew by double digits last quarter, but a Bloomberg Intelligence analyst suggested none of the $300 million may be paid without a marked turnaround.

Factors Behind the Markdown

1. An all-or-nothing payment. The earnout pays $300 million or nothing, so a narrow miss is treated the same as a total failure, and each piece of bad news pushes the expected value toward zero.
2. Buyer-controlled inputs. Because PepsiCo’s valuation relies on margin as well as revenue, its own decisions on pricing, promotion, marketing, and overhead bear directly on the outcome.
3. A distribution change. PepsiCo moved Poppi from its independent distributors into PepsiCo’s own system, and PepsiCo’s CEO acknowledged that the transition affected Poppi’s first-half 2026 results. The largest single-quarter markdown, $116 million, came in the first quarter of 2026. With a deadline about 28 months after closing, the time lost to integration fell on the sellers.
4. A competing product. PepsiCo shelved its own prebiotic soda effort, Soulboost, before buying Poppi. About two months after closing, it announced Pepsi Prebiotic Cola, which launched nationwide in February 2026. PepsiCo calls the brands complementary, and nothing public shows the new cola drew sales from Poppi. But a buyer that owns a competing product decides how shelf space and marketing dollars are divided, and its own product’s sales benefit the buyer, not the earnout.
5. Changes at the parent. PepsiCo’s North American beverage volume declined in the third quarter of 2026, and the company has faced activist pressure to refranchise its bottling system, the kind of parent-level change that can reshape an acquired brand mid-earnout.

Provisions Sellers Should Negotiate

1. Choose the right metric and define it precisely. Revenue is harder for a buyer to move through cost allocations than EBITDA or margin. If a profit metric is unavoidable, exclude integration costs, overhead allocations, and buyer-elected spending; apply the Seller’s historical accounting methods consistently with the target’s audited financial statements; include a worked example; and say who prepares the calculations and how the target is measured if combined with the buyer’s other businesses.
2. Replace the cliff with a scale. Graduated payments, multiple measurement periods, and catch-up rights keep one weak stretch from erasing the entire earnout.
3. Put the integration plan in the contract. If the buyer plans to change distribution, pricing, or sales channels, agree on the timing before signing and provide for a target adjustment or deadline extension if a buyer-directed change disrupts sales.
4. Give the efforts covenant objective content. Delaware courts treat “outward-facing” efforts standards, which compare the buyer to a similarly situated company, as objective obligations that do not turn on intent. Add concrete commitments, such as minimum marketing spend, and bar the buyer from considering the cost of the earnout, a prohibition the Delaware Supreme Court enforced against Johnson & Johnson. Make sure no “sole discretion” clause undercuts the covenant; a court may reconcile the two, but sellers should not rely on it.
5. Avoid intent-based anti-frustration clauses. A promise not to act “with the intent” of reducing the earnout is hard to enforce, and courts will not use the implied covenant to add protections the seller failed to obtain. Specific negative covenants work better: no diverting sales, discontinuing key products, or materially changing pricing or channels without the sellers’ consent.
6. Limit the buyer’s competing products. Seek a ban on launching or acquiring competing products during the earnout period. Fallback options include counting sales of competing buyer products toward the metric and requiring equal shelf, promotional, and sales-force support. In diligence, ask whether the buyer has a competing product in development or on hold.
7. Negotiate acceleration and payment security. Require payment if the buyer sells or discontinues the business, breaches its operating covenants, terminates key founders without cause, or restructures the distribution system the business depends on. If the buyer is an acquisition subsidiary, seek an escrow or parent guaranty and confirm its lenders cannot block the payments.
8. Protect founder roles, with care. Courts enforce bargained-for operational control and narrow “cause” definitions; in Fortis Advisors v. Krafton, the court reinstated a wrongly removed CEO and extended the earnout period by 228 days. A specific performance clause supports that relief. But tying the earnout to continued employment risks having it taxed as compensation at ordinary income rates rather than as capital gain.
9. Agree on damages in advance. In LaPoint v. AmerisourceBergen, the buyer breached its covenant to promote the acquired company’s products, but the sellers recovered only nominal damages because they could not prove the targets would have been met. Liquidated damages, or agreed estimates of the likelihood of success, avoid that result.
10. Secure information and dispute rights. Sellers need regular reports, access to the underlying books, and resolution of calculation disputes by an independent accountant on a fixed timeline, with the accountant’s role (expert or arbitrator) and fee allocation stated.
11. Address foreseeable risks and get promises in writing. Delaware courts will not rewrite an earnout to cover risks that were foreseeable at signing, so the agreement should address any planned overhaul, reorganization, or competing launch. The J&J court also upheld a fraud finding based on the buyer’s statements outside the agreement, a reminder to document the buyer’s projections and move key commitments into the contract.

Valuing the Promise Realistically

An earnout’s value depends on the buyer’s decisions as much as on the business. Sellers should ask whether a larger closing payment, rollover equity, or a holdback would serve the same purpose with less risk. The Poppi sellers may still be paid, but the drop from $278 million to $12 million in nine months shows how quickly contingent value can disappear and how much depends on terms settled before closing.

If you are considering a sale that includes an earnout, the M&A team at Kuhn Rogers can help you evaluate the terms and negotiate protections suited to your business.

Griffin G. Cole is an associate attorney at Kuhn Rogers PLC, where he advises entrepreneurs, investors, and businesses on mergers and acquisitions, entity formation, corporate governance, and commercial transactions. He can be reached at (231) 492-0713 or ggcole@kuhnrogers.com. View his full profile.