Earnout

AAA

DEFINITION of 'Earnout'

A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals.

INVESTOPEDIA EXPLAINS 'Earnout'

The financial goals are usually stated as a percentage of gross sales or earnings.

Say an entrepreneur selling a business is asking $2,000,000 based on projected earnings, but the buyer is willing to pay only $1,000,000 based on historical performance. An earnout provision structures the deal so that the entrepreneur receives more than the buyer's offer only if the business achieves a certain level of earnings. The exact numbers would depend upon the business, but in this example a simplified provision might set the purchase price at $1,000,000 plus 5% of gross sales over the next three years. The earnout thereby helps eliminate uncertainty for the buyer.

RELATED TERMS
  1. Revenue

    The amount of money that a company actually receives during a ...
  2. Bottom Line

    Refers to a company's net earnings, net income or earnings per ...
  3. Earnings

    The amount of profit that a company produces during a specific ...
  4. Anti-Dilution Provision

    A provision in an option or a convertible security. It protects ...
  5. Assembly Line

    A production process that breaks the manufacture of a good into ...
  6. Copyright Infringement

    The use or production of copyright protected material without ...
Related Articles
  1. Everything Investors Need To Know About ...
    Insurance

    Everything Investors Need To Know About ...

  2. Finding Per Diem Rates
    Budgeting

    Finding Per Diem Rates

  3. Understanding 'Per Diem'
    Budgeting

    Understanding 'Per Diem'

  4. Entrepreneur Vs. Small Business Owner, ...
    Investing Basics

    Entrepreneur Vs. Small Business Owner, ...

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center