Earnout
Part of the purchase price paid only if the business hits agreed performance targets after closing.
Also called: Contingent consideration · Performance payment
An earnout bridges a disagreement about the future. The seller believes the growth is real and durable; the buyer is not willing to pay for it up front. Rather than splitting the difference on price, the parties agree that a portion of consideration will be paid if defined results actually arrive — typically over one to three years, measured against revenue, gross profit, EBITDA, customer retention, or a specific milestone.
The measurement choice is where most of the risk lives. Revenue-based earnouts are the simplest to verify and the hardest for a buyer to manipulate, but they ignore whether the revenue was profitable. EBITDA-based earnouts align better with value and are far more exposed to post-closing decisions: allocated corporate overhead, a new ERP system, the buyer's pricing strategy, or a decision to invest in headcount can all reduce the measured figure without anyone acting in bad faith.
That is why the protective terms matter as much as the target. Sellers should press for a defined calculation methodology, agreed accounting policies, restrictions on cost allocations, information rights so they can see the numbers as they accrue, a dispute mechanism, and — where the seller stays on — clarity about who controls the decisions that drive the metric. An earnout you cannot audit is a promise, not consideration.
Where sellers get caught
- Agreeing a target based on a projection the seller would not personally bet on.
- Accepting an EBITDA earnout without any restriction on the buyer allocating corporate overhead to the business.
- No information rights. Sellers routinely find out they missed a target months after they could have done anything about it.
- Cliff structures where missing a target by one percent forfeits the entire payment. Sliding scales are far more common in well-negotiated deals.
Common questions
Do earnouts usually get paid?
Sometimes fully, sometimes partly, sometimes not at all. Outcomes vary enormously with how the target was set and how the business is run afterwards. The prudent approach is to treat an earnout as upside and to make the deal work on the guaranteed consideration alone.
Should I stay involved during the earnout period?
If the metric depends on decisions you no longer control, influence over those decisions is worth negotiating for. Many sellers accept a consulting or employment arrangement through the earnout period for exactly this reason, though it also constrains what you can do next.
Related terms
Seller financing
Part of the purchase price paid over time by the buyer to the seller under a promissory note, rather than in cash at closing.
Escrow and holdback
A portion of the purchase price kept back at closing to cover claims that arise afterwards, released once the claim period passes.
Rollover equity
A stake the seller keeps in the business after the sale, usually in the buyer's new holding company, in exchange for taking less cash at closing.
Letter of intent
A mostly non-binding document setting out the proposed price, structure, and process, whose binding provisions typically cover exclusivity and confidentiality.
Guides that use this term
Where earnout comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.