An earnout means the buyer pays part of the price now and part later, conditional on the business hitting agreed numbers after you’ve sold it.
Technically, it is a portion of the purchase price tied to post-completion performance, usually measured against revenue, EBITDA, or specific operational milestones.
The argument for an earnout is that it bridges a valuation gap. The buyer wants to pay less now and the rest only if the business performs. The earnout, in theory, defers the disagreement about value until time has shown who was right.
The catch is that you are no longer running the business when the targets are measured. The buyer is. Their decisions about pricing, investment, and discretionary spend all affect whether the earnout pays out. This is why our starting position for sellers is to negotiate the headline number down rather than accept an earnout. When an earnout is unavoidable, the most consequential drafting points are precise metric definitions, buyer-behaviour covenants protecting your ability to hit targets, treatment on a change of control, and the dispute mechanism if you and the buyer disagree about the figures.
What you as a seller should push back on: vague metric definitions, broad “buyer discretion” carve-outs, and earnouts measured on EBITDA without protection from below-the-line cost allocations.