Don't Burn Out: Earn Out

When sellers and buyers of a private business are close to a deal but cannot agree on the purchase price for the target company, they often turn to earnouts. Simply put, earnouts are contractual provisions stipulating that a seller will receive additional compensation in the future if the target business meets certain performance metrics.

Earnout provisions can be helpful in two important ways: (i) to help bridge a valuation gap between the parties, and/or (ii) financially motivate sellers to remain with the business after closing and continue to drive successful results. In some instances, where the goodwill of the business is very closely tied to the seller, buyers can also use earnouts to hedge against a post-closing decrease in revenue resulting from the seller's departure.