What Does “Earnout” Mean in a Contract?
A portion of acquisition price paid over time based on the acquired company's future performance meeting specified targets.
Detailed Explanation
Earnouts bridge valuation gaps—seller believes the business is worth more than buyer will pay upfront, so part of the price depends on future results. They're common when future performance is uncertain.
Earnouts create ongoing relationships and potential conflicts. How the business is run affects earnout payments, leading to disputes about decisions that hurt performance. Clear metrics and operational rules are essential.
Example in a Contract
“In addition to the closing payment, Seller shall receive earnout payments equal to 10% of revenues exceeding $5 million annually for three years post-closing, up to a maximum of $2 million total.”
Why It Matters
Earnouts sound good but are hard to collect. Buyers control the business and may make decisions that hurt your earnout (even if good for the business overall). Negotiate clear targets, operational covenants, and dispute resolution mechanisms.
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