Earnout

Definition

Price paid only if the business hits agreed targets after closing.

Also written earn out, earn outs, earnout agreement, earnout milestones.

Why It Matters

It bridges the gap between what a seller believes the business is worth and what a buyer will pay today by putting part of the price on future results. It also breeds disputes over how those results are measured once the buyer runs the company. On an SBA 7(a) purchase the rulebook prohibits a seller earnout outright, while a buyer rebate tied to performance is allowed and must pay down the loan.

In numbers: A $4M deal with a $667k earnout paid only if revenue holds above $6M for two years puts a sixth of the price on future performance; on an SBA-financed purchase that structure is not allowed at all.