Earnout

Definition

A part of the small business Purchase Agreement which sets a portion of the price contingent upon the business achieving some future financial performance goal.

What It Means

Earnout clauses are often included in the business purchase agreement if the buyer and seller disagree significantly over what the business should be worth. This is especially so if the business financial performance is expected to improve substantially at some future time, after the purchase.

In such cases, the purchase agreement may set an additional amount that the seller will receive in the future if this financial performance expectation is realized. One way to specify the earnout is as a percentage of revenues in excess of an agreed-upon amount, payable over a certain time period, and limited to some maximum.