Earnout

Definition

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

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, and on an SBA 7(a) deal the rules restrict it, so it rarely rides 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 deal that structure usually cannot ride the loan.