Earnout Cap
The maximum amount that the seller can receive under an earnout provision, limiting the total additional consideration paid.
Implications
A limit set on the total amount of additional compensation that can be paid out under an earnout arrangement, used to control financial exposure and ensure that the potential earnout payments are within an acceptable range for the buyer.
Example
Example: During the acquisition of a software firm, the buyer sets an earnout cap of $10 million, limiting the maximum additional payments to be made if the company exceeds performance targets.
Related Terms
Different from an uncapped earnout, where the seller could potentially receive unlimited additional payments, a capped earnout provides a defined maximum, protecting the buyer from excessive payouts.
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