Deal structure
An earnout is extra purchase price paid to the seller after closing, but only if the company reaches agreed targets such as revenue or profit.
An earnout ties part of the price to future results. The buyer pays a base price at closing. It pays more later if the company hits set targets, such as revenue or EBITDA, within a set period.
For example, a deal offers $25 million at closing and up to $5 million more if EBITDA reaches $6 million in year two. If the company misses the target, the extra $5 million is not paid.
Earnouts help close a gap when buyer and seller see the future differently. The risk for you is that the buyer controls the business after closing. Clear definitions, how costs are counted and who makes key decisions all matter. Have a lawyer review the formula.
Most owners prefer more cash at closing and fewer strings. Weigh the trade-off before you agree. Details are in the earnouts guide. See also letter of intent and escrow.
Related terms
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