Earnout

Part of the price paid later, only if the business hits agreed targets after closing. It bridges a gap between what a seller wants and what a buyer will pay today.

In more detail

An earnout defers a slice of the purchase price and makes it conditional, usually on revenue or EBITDA over one to three years after close. It exists when the two sides disagree about the future: the seller believes the growth is real, the buyer is not paying for it until it shows up. The terms decide whether it is worth anything. What metric, measured how, by whom, and what happens if the buyer changes the business in ways that affect the number. An earnout tied to a metric the buyer controls and the seller no longer influences is a coin flip.

For example

A seller wants $6M, the buyer offers $5M. They agree $5M at close plus $1M if EBITDA exceeds $1.2M in the year after closing.

If you are selling

Treat the earnout portion as possible, not promised. If the deal only works with the earnout paid in full, it is not a deal you can afford. Negotiate the measurement definition harder than the amount.

If you are buying

It shifts risk onto the seller for performance you cannot yet verify, but beware the incentive it creates: a seller who no longer runs the business cannot deliver the number, and a resentful former owner is an expensive way to save money.

Related terms

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