Earn-out — Exit Glossary

Earn-out

Also known as Earnout, Contingent consideration

An earn-out is a way of structuring a sale in which part of the price is paid later, and only if the business meets agreed performance targets (such as revenue or profit) during a set period after completion, usually one to three years. It lets a buyer and seller bridge a disagreement over what the company is worth by tying some of the money to results the seller expects but the buyer wants to see proven first.

Why it matters at exit

An earn-out can raise the total a buyer is willing to agree, but it shifts risk onto you: if trading dips, key customers leave or the new owner runs things differently, you may receive far less than the headline figure, or nothing at all. You will normally have to stay involved and keep hitting targets after you have handed over control, so a business that performs without you and a clean handover both protect the money still owed. Most earn-out disputes come from vague wording, so get the targets, the exact way profit is measured, and the buyer’s obligations written down precisely before you sign.

Frequently asked questions

How long should an earn-out last?

Most run for one to three years after completion. The longer the period, the more chance that events outside your control affect the outcome, so a shorter term generally favours the seller.

Is it better to base an earn-out on revenue or profit?

Revenue targets are simpler and harder for a buyer to erode, because costs the new owner controls do not reduce what you are paid. Profit or EBITDA targets are also common, but insist on a clear written definition of how profit is calculated, so shared costs or charges from the buyer's wider group cannot quietly eat into it.

Why it matters at exit

Frequently asked questions

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