Earn-Out
Definition
An earn-out is a deal structure in which part of the price for a business is deferred and paid only if the business meets agreed performance targets after completion, usually measured over one to three years by revenue, profit or another metric. It bridges a gap in value expectations: the buyer pays more only if the future the seller promised actually materialises, and the seller can capture that upside by staying involved. Earn-outs are common where a business depends on its founder, where growth is central to the price, or where the buyer wants to retain and motivate key people. They also carry friction — disputes over how the targets are measured, how the business is run during the earn-out, and how much freedom the seller retains — so the definitions in the sale and purchase agreement matter greatly. In the UK, earn-out proceeds can have particular tax consequences that are worth planning for in advance.
Complementary Terms
Concepts that frequently appear alongside Earn-Out in practice.
A portion of the purchase price in an acquisition that is payable at a future date, either as a fixed amount or contingent on the achievement of specified milestones. Deferred consideration must be recognised at fair value at the acquisition date under IFRS 3 and ASC 805, with subsequent changes in value typically recorded through profit or loss.
A vendor loan note (also called vendor finance or a deferred loan note) is an arrangement in which the seller of a business lends part of the purchase price back to the buyer, to be repaid over time with interest. Instead of receiving the whole price in cash at completion, the seller takes a loan note for a portion of it, which the buyer pays down from the acquired business's cash flow.
The sale and purchase agreement (SPA) is the definitive contract that transfers ownership of a business from seller to buyer. It sets out the price and how it is paid, the completion mechanism, and the warranties and indemnities the seller gives about the state of the business.
Reverse due diligence is diligence a seller, or the management team of a target, carries out on the buyer. In any deal where the seller retains an ongoing interest — an earn-out, a rollover of equity into the enlarged group, or a management team joining a private-equity platform — the buyer's quality matters as much to the seller as the reverse.
Further Reading
Related FAQ
What is a management buyout (MBO) and how are valuations determined?
An MBO is an acquisition where the company's management team becomes majority owners, typically with financial sponsor backing. Valuations are negotiated between management and seller/sponsor.
Read full answer →Heads of terms is the short document recording the main commercial terms a buyer and seller have agreed in principle — price, structure, earn-out, conditions and exclusivity — before formal contracts are drafted. It is mostly non-binding.
Read full answer →How do I finance a business acquisition?
Combine sources into a capital stack: your equity, senior bank debt, asset-based lending, IP-backed lending against intangible assets, and vendor finance such as loan notes or an earn-out.
Read full answer →Put this knowledge to work
Use Opagio's free tools to measure and grow the intangible assets that drive your business value.