Earnout
A contingent portion of an acquisition's purchase price, paid only if the acquired company hits agreed performance targets after the deal closes.
An earnout defers part of an acquisition's total consideration, paying it out over a period (commonly 1-3 years) post-closing, contingent on the acquired business hitting specified financial or operational milestones — revenue targets, product launches, retention of key customers or employees. It's used to bridge valuation disagreements between buyer and seller, or to keep founders and key employees incentivized to perform after the sale.
Earnouts introduce real risk for sellers: the acquirer typically controls how the business is run post-close, which can directly affect whether earnout targets get hit, and disputes over whether the acquirer acted in good faith to help (or hurt) earnout achievement are a common source of post-acquisition litigation.
A $60M acquisition includes $40M paid at closing and a $20M earnout paid over two years if the acquired business hits $15M in revenue in year one and $22M in year two, measured under the acquirer's own accounting.
Negotiate specific operational protections into the earnout terms — guaranteed budget, continued autonomy over the business unit, clear definitions of the metrics being measured — since a poorly protected earnout can be effectively controlled away by the acquirer after closing.
Are earnouts risky for the selling company's shareholders?
Yes — because the acquirer typically controls post-close operations, sellers bear real risk that decisions outside their control (integration choices, resource allocation) affect whether earnout targets are actually achieved.
Related terms
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