What Are Earnouts?

Published on January 19, 2023

An earnout is a financial arrangement in which the seller of a company or a business interest receives additional payments based on the performance of the company or business after the sale has been completed. The purpose of an earnout is to align the interests of the buyer and seller and to provide an incentive for the seller to ensure the continued success of the company or business.

There are several different types of earnouts that can be used in different situations, depending on the needs and goals of the buyer and seller. Some examples of earnouts include:

Revenue-Based Earnouts: In this type of earnout, the seller receives additional payments based on the revenue generated by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the long-term revenue potential of the company or business.
Profit-Based Earnouts: In this type of earnout, the seller receives additional payments based on the profits generated by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the long-term profitability of the company or business.
Milestone-Based Earnouts: In this type of earnout, the seller receives additional payments based on the achievement of specific milestones or targets set by the buyer. This can be a good option if the buyer is interested in specific projects or initiatives that the seller will be working on after the sale.
Customer-Based Earnouts: In this type of earnout, the seller receives additional payments based on the retention and acquisition of specific customers by the company or business after the sale. This can be a good option if the buyer is particularly interested in the customer base of the company or business.
Employee-Based Earnouts: In this type of earnout, the seller receives additional payments based on the retention and acquisition of specific employees by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the talent and expertise of the company or business.
Stock-Based Earnouts: In this type of earnout, the seller receives additional payments in the form of stock in the company or business after the sale. This can be a good option if the buyer is interested in providing the seller with a long-term stake in the company or business.

These are just some possibilities, but overall, earnouts can be a useful tool for aligning the interests of buyers and sellers and ensuring the continued success of a company or business after a sale. They can be structured in a variety of ways to meet the specific needs and goals of the parties involved.

*** The content is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional(s) before entering into any M&A transaction. ***

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Shawn Flynn is a Principal at Global Capital Markets, a premier middle-market investment bank with a global presence. Shawn has expertise in mergers and acquisitions, capital markets, financial restructuring, and secondaries. He speaks Mandarin and is the host of the award-winning Podcast The Silicon Valley Podcast. Connect with him on LinkedIn.

Shawn Flynn, Principal SF@GlobalCapital Markets.com

Tel (415) 578-1445 Ext. 4

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As a middle market investment banking boutique, Global Capital provides mergers and acquisition advisory services, access to corporate debt and equity capital, and strategic advisory services to successful middle market companies. For over twenty five years, our team has offered companies a unique blend of sophisticated financial expertise and access to the global marketplace of buyers, sellers and financiers.

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