Earnout.
In plain English
An earnout holds back a portion of the purchase price and releases it only when the acquired business meets specified milestones, usually revenue or profit targets over one to three years. It exists because buyer and seller often disagree about what the business will do next, and an earnout lets them split the difference by tying payment to the actual result. The mechanics matter enormously: who controls the business during the measurement period, how the targets are calculated, and what happens if the buyer reorganizes the unit. Earnout disputes are a common source of post-deal litigation.
01Why it matters
Founders selling a company often find a large share of the headline price sitting inside an earnout they no longer fully control once the buyer takes over.
02The math, step by step
A company sells for $50 million up front plus $20 million if revenue reaches $40 million within two years. Revenue lands at $36 million, so under a straight all-or-nothing structure the seller receives $50 million, not the $70 million in the announcement.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A retention bonus is compensation for continued employment and is taxed as pay. An earnout is deferred purchase price tied to business performance. The distinction affects both who receives it and how it is treated, so deal documents define it carefully.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice