Earn-Out
Additional acquisition payments contingent on hitting post-acquisition performance targets.
Definition
An earn-out is a portion of an acquisition price that is paid over time, contingent on the acquired company meeting specific performance milestones after the deal closes. Earn-outs bridge valuation gaps between buyer and seller: the buyer pays less upfront but agrees to pay more if the business performs well. Earn-out periods typically last 1-3 years with targets tied to revenue, customer retention, or product milestones.
Why it matters
If part of your acquisition payout is in earn-outs, you may not receive the full expected value. Earn-out targets can be difficult to hit after integration, especially if the acquirer changes strategy, leadership, or priorities.
Example
Your company is acquired for $80M upfront plus a $20M earn-out if revenue grows 30% in the first year post-acquisition. If the team hits the target, total payout is $100M. If revenue only grows 15%, the earn-out might pay $10M or nothing, depending on the structure.