Glossary
Earn-out
An earn-out is a way of paying for a business where part of the price depends on how the company performs after the sale. The seller receives an initial payment at closing and further payments later if agreed targets, such as revenue or profit, are met, bridging differing views on what the business is worth.
Last updated
An earn-out ties part of a purchase price to the future performance of the business being sold. Rather than paying the whole amount at closing, the buyer pays an initial sum and agrees to pay more over the following period if the company hits agreed measures, often revenue or profit. Earn-outs are used to bridge a gap in expectations: when a seller believes the business will keep growing and a buyer wants proof before paying for that growth, an earn-out lets the outcome decide.
They can align both sides, since the seller is rewarded for continued success, but they also depend on how the business is run after the sale, which is why the terms and who controls the business matter a great deal. For an owner, an earn-out is worth understanding early in a sale, because its structure shapes how much of the price is certain and how much depends on what happens next. It is a common feature of the terms first outlined in a letter of intent.