Earnout

What Is an Earnout?

An earnout is a provision in a business sale agreement under which part of the purchase price is paid only if the acquired company meets agreed targets after the deal closes. It is common in mergers and acquisitions (M&A), where a buyer and seller disagree about valuation. Rather than settling the gap through negotiation alone, they agree to pay a portion of the price later, depending on how the business actually performs.

How an Earnout Works

The agreement sets out three things: the performance measure, the target, and the measurement period. Common measures include revenue, gross profit, or EBITDA. The measurement period often runs from one to several years after closing. The buyer pays a fixed amount at closing, and the remaining amount is paid in one or more installments if the targets are reached. Payments may be all-or-nothing, or they may scale with results above a minimum threshold.

Why Earnouts Matter

For buyers, an earnout shifts some of the risk of overpaying onto the seller, because the extra payment is made only if the forecasts prove accurate. For sellers, it offers a route to a higher total price when they believe in future growth. Because the seller often stays on to help the business reach its targets, earnouts can also keep management engaged during a transition.

Risks and Disputes

Earnouts are a frequent source of disagreement. The definitions of revenue or earnings, the accounting methods used, and how shared costs are allocated after the deal can all be contested. A seller may have little control over the business once the buyer owns it, yet their payment depends on its results. For this reason, agreements usually spell out how the figures are calculated and what the buyer may or may not do during the earnout period. On the buyer's books, the expected payment is typically recorded as contingent consideration at estimated fair value, and that estimate may change over time.