Deal Structure
Earnout
Also known as: Contingent consideration, performance payment
A portion of the purchase price paid only if the business hits specific performance targets after closing. Typically runs 1-3 years post-close and is tied to revenue or EBITDA.
WHY IT MATTERS
Earnouts shift risk from the buyer to the seller. If the business performs as promised, the seller gets paid. If it doesn't, the seller gets less. Earnouts are often called "litigation magnets" because buyers control the business after closing and therefore influence whether the targets are hit. Revenue-based earnouts are more seller-friendly because revenue is harder for the buyer to manipulate. EBITDA-based earnouts favor the buyer because they control cost decisions that affect EBITDA. A have-to-sell founder often accepts EBITDA-based earnouts with buyer-controlled adjustments; a want-to-sell founder negotiates objective revenue-based triggers.