Acquisitions

Earnouts in Acquisitions

Understand earnouts, which pay part of the price only if the business hits agreed targets, and how they bridge valuation gaps while de-risking the buyer.

  • Beginner
  • 16 min total
  • 12 chapters

What decision this helps you make: Whether and how to use an earnout, and how to structure one to bridge a valuation gap without breeding disputes.

What this topic is

An earnout is a deal structure where part of the purchase price is paid later, contingent on the business hitting agreed performance targets. It bridges a valuation gap, between the seller's optimistic price and the buyer's caution about unproven performance, by tying the disputed amount to the business actually delivering.

Why it matters

When buyer and seller disagree on price (usually about the future), an earnout resolves it: the seller gets their price if the business performs, and the buyer pays it only if it does. It de-risks the buyer and keeps the seller motivated, but it's a notorious source of disputes, so the terms must be precise.

Who should learn it

Anyone facing a valuation gap in an acquisition, especially where future performance is uncertain.

What you will understand

  • Understand an earnout: part of the price paid only if targets are met
  • See how it bridges a valuation gap (optimistic seller vs. cautious buyer)
  • Know how it de-risks the buyer and keeps the seller motivated
  • Structure it precisely to avoid post-closing disputes

Prerequisites

Common misconception

"An earnout is just a way to lower the price." Not quite. It's a way to bridge a disagreement about the price, usually about the future. The seller thinks the business is worth more (based on growth they expect); the buyer won't pay for unproven performance. An earnout says: "If the business really performs as you claim, you'll get the extra money." It de-risks the buyer and gives the seller a path to full value.