How earnouts pay out, and when to refuse one
An earnout holds back part of your price and pays it if the business performs after you leave. Whether that is reasonable or a trap depends on one thing: what it is measured on.
What an earnout is for
Buyers use earnouts to bridge a gap in confidence, not in price. If a third of your revenue sits with one customer whose contract renews after close, the buyer is being asked to pay today for something they cannot verify. An earnout moves that risk back to you.
Revenue against profit
A profit-based earnout hands the person who owes you money full control over the number that decides whether they pay.
The four terms to pin down
- The metric, defined in writing, with the exact calculation.
- The period, and the reporting frequency inside it.
- The threshold and whether it pays in tiers or all at once.
- What happens if the buyer sells the business again before the period ends.
When to refuse outright
- It is measured on profit and the buyer will not move to revenue.
- It runs longer than 18 months.
- It depends on something you no longer influence and cannot see.
- It is more than a quarter of the total price.
What a shorter earnout is worth
Cutting an earnout is worth real money to you, so trade for it. A buyer who wants a shorter transition or a faster close will often halve the earnout to get it. Cash at close and the earnout add up to the price, so every dollar taken off the earnout is a dollar at close unless the price moves too.
After close
Both sides keep the closing readable. It keeps the earnout as the agreed terms set it, with the dates the close gave it: what it is measured on, the target and the period. Revanu states it and does not track it; the filings and the payments run between you and the buyer under the purchase agreement.