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.
Earnouts bridge valuation gaps: when the seller believes the company is worth more based on its trajectory and the buyer will only pay for its history, an earnout lets both sides sign. The structural catch is that the buyer controls the business after closing — budgets, staffing, accounting, and integration decisions all affect whether targets are hit.
Value an earnout at its expected value, not its maximum. A deal with a large contingent component isn't worth its headline number, and earnouts frequently pay out partially or not at all. Decide whether the deal works at the closing payment plus a realistic estimate of the earnout.
The metric choice is one of the highest-leverage negotiations. Revenue targets are harder for a buyer to influence than EBITDA, which moves with corporate overhead allocations and accounting choices. Shorter earnout periods also give the buyer less time to deprioritize the acquired product.
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.
Are revenue or EBITDA earnout targets better for sellers?
Usually revenue. EBITDA can be pushed down by overhead allocations, accounting choices, or front-loaded costs that the buyer controls; revenue is harder to manipulate. If you accept an EBITDA target, define the accounting in a schedule with a worked example.
What protections should a seller negotiate in an earnout?
Clear metric definitions, an obligation for the buyer to operate the business in a way that gives the earnout a fair chance, information rights during the earnout period, and acceleration if the buyer sells the business, terminates key people without cause, or discontinues the product.
How long do earnouts usually run?
Commonly one to three years. Shorter periods are generally better for sellers because there's less time for integration decisions to undercut the targets.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.