Definition
Earnout
A deal structure where part of the purchase price is paid based on future performance.
Definition
An earnout is a deferred payment mechanism where a portion of the acquisition price is contingent on the business achieving specified performance targets post-sale. Earnouts are common when there is a valuation gap between buyer and seller, or where owner dependency risk is high — the seller stays on and is incentivised to hit targets to receive the deferred amount.
Worked Example
A buyer and seller agree on a $500,000 base price plus up to $100,000 in earnout if the business achieves $180,000 EBITDA in the first 12 months post-acquisition. This aligns seller incentives during the transition period.
Related Terms
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