Earnout Mechanism

Definition

A contractual arrangement in an M&A transaction where a portion of the purchase price is contingent on the acquired business achieving specified financial or operational targets during a defined period following completion. Earnouts bridge valuation gaps between buyer and seller, incentivise seller retention and performance, and reduce buyer risk. Common earnout metrics include revenue, EBITDA, gross profit, and customer retention targets. Earnout disputes are among the most litigated areas of M&A law.