Earnout
A provision in an acquisition agreement that allows the seller to receive additional compensation if the business achieves specified financial goals post-acquisition.
Implications
A financial arrangement in which the seller of a business receives additional compensation based on the future performance of the business, often used in mergers and acquisitions to bridge valuation gaps and align incentives between buyer and seller.
Example
Example: A tech company acquires a startup with an earnout clause that provides the founders with additional payments if the startup meets revenue targets over the next three years.
Related Terms
Different from an upfront payment, which is made immediately at the time of sale, an earnout ties additional payments to future performance, reducing risk for the buyer.
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