Earnout

What it means

An earnout is a part of the purchase price held back and paid only if the business performs to an agreed standard after completion. It exists to settle a disagreement: the seller believes a revenue level is sustainable, the buyer is not convinced, and rather than argue the multiple down, both sides agree to let the outcome decide. The seller gets the full price if they were right.

What to measure it against

Tie it to something the buyer cannot influence and neither side can reinterpret. Revenue and traffic are the usual choices because they are hard to manipulate and simple to read. Profit is a poor basis, because the buyer controls spending and can depress profit without doing anything improper. Whatever the measure, define the source of the figure, who produces it, and when.

Where they go wrong

Almost every earnout dispute comes from a target that was clear to one party and ambiguous to both. Revenue defined without saying whether refunds are deducted. Traffic without naming the analytics property. A quarterly target with no stated treatment of seasonality. Write the measurement into the agreement in the form of a calculation, and include an example using real numbers, so the first payment is arithmetic rather than negotiation.

The seller’s protections

Four things make an earnout acceptable: a defined measure, a right to see the underlying figures, a cap on the share of the price at risk, and a clause covering what happens if the buyer changes the business in ways that affect the target. Without the last one, a buyer who redirects the site or drops a revenue stream can defeat the earnout while doing nothing wrong. Twenty to thirty percent of the price is a common ceiling.