What is Earnout?
A portion of the acquisition price paid later, only if the business hits agreed milestones after the deal closes.
An earnout defers part of the purchase price and makes it contingent on post-close performance - revenue, profit, product milestones, or customer retention - usually measured over one to three years. Buyers love earnouts because they bridge a valuation gap and keep founders motivated; sellers should treat earnout dollars as far less certain than cash at close. Why it matters to you: once the buyer controls the business, they also control many of the levers that decide whether you hit your targets (budgets, hiring, how revenue is recognized). Tie earnouts to the cleanest, least-gameable metric you can, define it precisely in the agreement, and never count on the earnout for your base-case outcome.
Example
- A $50M deal pays $35M at close and up to $15M over two years if the acquired unit hits $20M and then $28M in annual revenue - paid pro rata if targets are partially met.