Earnout
Also known as: Contingent Consideration, Earn-Out
An earnout is a portion of the purchase price paid to the seller only if the business hits agreed financial targets after closing, bridging gaps in valuation.
An earnout is deferred, conditional purchase-price consideration. Part of what the seller receives is paid only if the business achieves specific targets, such as revenue or EBITDA thresholds, in the months or years after closing.
Why earnouts exist
They bridge disagreements over value. If a seller believes the business is worth more than a buyer will pay up front, an earnout lets the seller earn the difference by proving the performance is real. It also keeps a departing owner motivated through the transition.
Where they get contentious
Earnouts are a frequent source of post-deal disputes. The parties must define the targets, the measurement period, and who controls the business precisely, or they will argue later about whether the earnout was met. Heavy customer concentration often pushes more of the price into an earnout.