An earnout is a financial arrangement in which a portion of the purchase price for a business is contingent upon the future performance of that business. This structure is often used in mergers and acquisitions to bridge the gap between the seller’s expectations and the buyer’s valuation of the business.

Characteristics
– Contingent Payment: A part of the total purchase price is paid based on the business achieving specific financial targets, such as revenue or profit goals.
– Time Frame: Earnouts typically have a defined period, often ranging from one to three years post-acquisition, during which the performance metrics are assessed.
– Performance Metrics: The metrics used to determine the earnout can vary, including sales figures, EBITDA (earnings before interest, taxes, depreciation, and amortization), or other key performance indicators.
– Risk Sharing: Earnouts allow both buyers and sellers to share the risk associated with the future performance of the business.

Examples
– A buyer agrees to pay $5 million upfront for a company, with an additional $2 million contingent on the company achieving $1 million in EBITDA over the next two years.
– In a tech acquisition, the seller might receive an initial payment of $10 million, with an earnout of up to $5 million based on reaching specific user growth targets within 18 months.