Earnout

What is an Earn out?

An earn out is an agreement in which the sellers of a private company may receive additional consideration over a defined period, typically two to five years after the sale. Although the business has been sold, the sellers can earn further payment if the company meets minimum performance metrics, usually measured by profits or revenue. This structure rewards sellers for contributing to post acquisition growth and ensures continuity for the new owners.

Why is an Earn out important for buyers?

Buyers often value a business based on anticipated earnings growth. An earn out provides reassurance that the future performance used to justify the acquisition will be delivered. If the business achieves the agreed targets, the buyer is satisfied that the acquisition thesis is sound; if not, the buyer is protected from overpaying. This creates a balanced arrangement that works for both parties motivating sellers while managing risk for the acquirer.