What is an earn-out?

Earn-out terms sit in the purchase agreement, which sets the metric, the measurement period and how the buyer must run the business meanwhile. Metrics are often revenue or EBITDA, sometimes milestones such as regulatory approval. Payments may be all-or-nothing or sliding. It is often confused with deferred consideration, which is owed regardless of performance, and with a management incentive plan.

Say a buyer pays $80 million for a company, plus up to $20 million more if its revenue reaches an agreed level in two years.

It bridges a gap between what a seller wants and a buyer is willing to risk, and it is a common source of later disputes.