Earnout
Definition
An earnout is a portion of the purchase price that is paid only if the business hits agreed targets after closing, usually revenue or EBITDA over one to three years. It bridges a valuation gap: the seller believes the forecast, the buyer does not, so they bet on it.
In practice
Earnouts close deals and start disputes. After closing, the buyer controls the business and its accounting, and every integration decision can depress the earnout metric. Sellers should negotiate the protections, and the accounting definitions, as hard as the price.