Earnouts in M&A: Definition, Structure and Key Considerations
An earnout is a contingent payment in an acquisition. Part of the purchase price is paid later if the company meets certain targets.
How Earnouts Work
Structure:
- Upfront payment: Paid at close
- Earnout payment: Contingent on performance
Common Metrics
- Revenue
- EBITDA
- Net income
- Customer milestones
Key Considerations
For Buyers
- Aligns seller incentives
- Reduces risk
- Can create disputes
For Sellers
- Upside participation
- Risk of non-payment
- Control issues post-close
Common Pitfalls
- Accounting treatment disputes
- Metric manipulation
- Legal disputes
