earnout

Earnout

A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals.

Notes:

The financial goals are usually stated as a percentage of gross sales or earnings.

Say an entrepreneur selling a business is asking $2,000,000 based on projected earnings, but the buyer is willing to pay only $1,000,000 based on historical performance. An earnout provision structures the deal so that the entrepreneur receives more than the buyer's offer only if the business achieves a certain level of earnings. The exact numbers would depend upon the business, but in this example a simplified provision might set the purchase price at $1,000,000 plus 5% of gross sales over the next three years. The earnout thereby helps eliminate uncertainty for the buyer.

See also: Anti-Dilution Provision, Bottom Line, Earnings, Revenue

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earnout

A contingency component of an acquisition agreement in which the acquiring company agrees to additional payments in the event certain performance-based goals are achieved. For example, Sylvan Learning Systems in 1995 acquired Drake Prometric for $20 million in cash plus 5.9 million restricted Sylvan common shares. The deal included an additional 2.7 million Sylvan shares to be released to the sellers in the event stipulated revenue goals were met through 1998.