Earn-Out

An earn-out is a deal structure in which part of the purchase price is paid to the seller after closing, contingent on the business achieving specified performance targets — typically revenue or EBITDA milestones — over an agreed period following the sale.

Earn-outs bridge valuation gaps between buyers and sellers when there is disagreement about the business's future performance. The buyer pays a base price at closing, with additional payments if the business performs as the seller projects. If performance falls short, the earn-out is not paid or is paid at a reduced amount.

Earn-out structures require careful drafting to define performance metrics, measurement periods, reporting obligations, and the buyer's obligations to operate the business in a manner consistent with achieving the targets. Disputes over earn-outs are common — particularly where the buyer's post-closing management decisions affect the business's ability to hit milestones. Earn-outs are more common in transactions with high customer concentration risk, businesses in early growth stages, or where the seller's continued involvement is a key value driver.

See also: Holdback, Escrow, Purchase Agreement, Customer Concentration.