Earnout
A portion of the purchase price contingent on the acquired company hitting specific financial or operational milestones after closing.
Full definition
An earnout is a structural mechanism that ties part of the seller's payout to post-close performance. Typical earnouts are structured around revenue, EBITDA, customer retention, or specific milestones (regulatory approvals, product launches), measured over 1 to 3 years post-close. Earnouts bridge valuation gaps between buyer and seller, reduce buyer risk, and align seller incentives during transition. They are common in deals where forward growth is critical to the buyer's thesis but unproven, especially in AI, SaaS, and early-stage fintech. Sellers should negotiate hard for clear measurement methodology, control protections (so the buyer cannot manipulate metrics post-close), and acceleration triggers for material breach or change of control. Poorly structured earnouts produce litigation and burned relationships. Well-structured ones can capture meaningful upside.
Related terms
A non-binding (mostly) document that outlines the proposed terms of an M&A transaction. Triggers exclusivity and detailed diligence.
Ratios of enterprise value to a financial metric (revenue, EBITDA, ARR) used to value M&A transactions by comparison.
When sellers reinvest a portion of their proceeds into the acquiring entity, sharing in future upside alongside the new owner.
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