Earnout

A provision in an acquisition agreement where a portion of the purchase price is paid to the seller contingent on the business achieving specific future performance targets after the transaction closes.

Earnouts bridge valuation gaps between buyers and sellers who disagree on future potential. For sellers, they offer the opportunity to earn a higher total price if the business performs. For buyers, they reduce upfront risk by tying payment to results.

A founder sells her business for £500,000 upfront plus a potential £200,000 earnout if the business achieves £300,000 in revenue in the 12 months following the sale. She stays on for the earnout period to drive results, ultimately earning the full £700,000.