Earn-Out

A portion of a purchase price paid contingent on the acquired business achieving agreed performance targets after closing, rather than paid in full at the time of sale.

Example

A deal structures 15% of the total price as an earn-out payable only if revenue exceeds 950,000 in the twelve months after closing.

Important

It shifts risk onto the business's post-closing performance and the seller's ongoing cooperation, and ambiguity over who controls operating decisions during the earn-out period is a common source of dispute.

Related terms

• Seller Financing — An arrangement in which the seller of a business agrees to accept part of the purchase price over time, typically as a promissory note subordinated to a bank loan.
• Conditions precedent — Things that must happen before a transaction completes - a consent obtained, a licence transferred, a regulatory approval granted.

Lessons that explain it

• The headline sale price is not what investors receive — Proceeds from a sale flow through debt, transaction costs, preferences, escrow and earnouts before reaching each shareholder. The waterfall decides what a headline price is worth to you. (13 min)
• Small shareholders mostly sign, but what they sign matters — An acquisition involves warranties, indemnities, escrow and a drag-along that can compel minority holders to participate. Understanding the documents before signing is the last chance to know what you are agreeing to. (11 min)
• Franchise royalties and goodwill amortisation both compound quietly over the holding period — Beyond key-person and concentration risk, a small-business purchase carries recurring costs and tax treatment that materially change the price a buyer can justify and the return a seller actually keeps - none of which shows up in a headline SDE multiple. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (12 min)

All 578 terms in the Investing glossary