Earnout

What Is an Earnout?

An earnout is a deal structure where part of the acquisition price is contingent on the target company’s post-closing performance (Investopedia). Rather than paying the full purchase price at closing, the buyer agrees to make additional payments — the earnout — if the business meets defined milestones, typically tied to revenue, EBITDA, or other financial metrics over a one-to-three-year period.

Earnouts bridge valuation gaps between buyers and sellers. When the parties disagree on what a business is worth — often because of differing views on future growth, as is common in the sell-side M&A process — an earnout allows the seller to earn a higher price if their optimistic projections materialise, while protecting the buyer from overpaying if they do not.

When Earnouts Are Used

Earnouts are most common in situations where:

• Valuation disagreement — the buyer and seller cannot agree on a fixed price
• Growth-stage businesses — companies with promising but unproven growth trajectories (see our guide to selling a business for how earnouts factor into exit planning)
• Key person dependency — the founder or key employees are critical to future performance, and the earnout incentivises their continued involvement
• Cyclical businesses — companies whose near-term performance may not reflect long-term value
• Regulatory or market uncertainty — pending approvals, product launches, or market developments that could materially affect value

Structuring an Earnout

Performance Metrics

The choice of metric is critical and heavily negotiated:

• Revenue-based — simpler to measure and less susceptible to manipulation, but does not account for profitability
• EBITDA-based — captures profitability but can be influenced by the buyer’s post-closing decisions on costs, investment, and accounting policies
• Gross profit — a middle ground between revenue and EBITDA
• Non-financial milestones — product launches, regulatory approvals, customer contract renewals, or retention of key employees

Measurement Period

• Typically 1–3 years post-closing, with annual or cumulative measurement points
• Longer periods increase uncertainty for both parties
• Some earnouts include both annual targets and a cumulative catch-up provision

Payment Terms

• All-or-nothing — full earnout paid if the target is met, nothing if it is not
• Tiered / sliding scale — partial payments for partial achievement, scaling up to a maximum
• Accelerators — bonus payments for exceeding targets
• Floors and caps — minimum and maximum earnout amounts

Earnout Disputes

Earnouts are among the most litigated provisions in M&A agreements. Common areas of dispute include:

• Buyer’s conduct — allegations that the buyer deliberately managed the business to reduce earnout payments (e.g., reallocating revenue, increasing expenses, or underinvesting)
• Accounting methodology — disagreements over how EBITDA or revenue should be calculated during the earnout period
• Integration decisions — whether the buyer’s operational changes (product rationalisation, headcount changes, customer migration) unfairly affected earnout metrics
• Good faith obligations — most earnout provisions require the buyer to operate the business in “good faith” or in the “ordinary course,” but these terms are inherently subjective

Protecting Against Disputes

Seller Protections

• Define the accounting methodology in detail within the SPA
• Require the buyer to operate the business as a standalone unit during the earnout period
• Include specific covenants restricting buyer actions that could reduce earnout metrics
• Establish a clear dispute resolution mechanism (independent accountant, arbitration)

Buyer Protections

• Preserve operational flexibility to integrate and manage the business
• Tie earnout metrics to measures the buyer can verify and audit
• Include anti-sandbagging provisions
• Set reasonable targets based on the seller’s own projections

Earnouts in Asia Pacific

Earnout structures in Asia Pacific M&A transactions require careful consideration of local enforcement mechanisms, as discussed in our overview of business valuation in APAC. In some jurisdictions, the legal framework for enforcing contingent payment obligations may be less developed than in Western markets. Currency denomination is a practical concern — parties must agree whether earnout payments are calculated and paid in local currency or a reference currency. Cultural factors also play a role; in relationship-driven markets like Japan and Korea, earnout disputes can damage post-closing collaboration between buyer and seller management. AI-native platforms like Amafi help dealmakers model and benchmark earnout structures across Asia Pacific transactions.