What is an Earnout? Is it a good option?

What-is-an-earnout-650Earnout refers to a pricing structure where the sellers must “earn” part of the purchase price based on the performance of the business following the acquisition. In an earnout, part of the purchase price is paid after closing based on the target company achieving certain financial goals.

Earnouts are used as an incentive for existing management to remain with the business and take some risk off the table. In return for selling off a percentage of their shares, management remains with the business to help transition to a new management team.