What is an earnout, and is it good or bad for sellers?

An earnout is a slice of the purchase price that the buyer pays only after closing, and only if the business hits agreed targets — most often revenue, EBITDA, or customer retention measured over one to three years. It sits alongside the cash paid at close and other deferred pieces like seller notes and equity rollover.

Buyers use earnouts to bridge a valuation gap (you think the business is worth more than they'll pay up front), to de-risk an uncertain forecast, and to keep the seller motivated through a transition. In private equity deals, 60% to 80% of the price is usually cash at close, with earnouts, seller notes, or rolled equity making up the remaining 20% to 40%.

Whether an earnout is good or bad depends entirely on the terms. The upside is real — if the business performs, an earnout can push your total proceeds above a straight cash offer. The risk is that after closing you often don't fully control the levers: the new owner's decisions, accounting changes, integration, or reinvestment can all move the target you're being measured against.

Protect yourself by defining the metric precisely (gross vs. adjusted, which accounting method), keeping the measurement period short, tying payment to milestones you can influence, and negotiating acceleration if the buyer sells or restructures the business. As a rule, weight the deal toward cash at close and treat the earnout as upside, not money you're counting on. Always have an M&A attorney paper the terms.