Earnout
Content
Definition
Earnout is a financing agreement where the seller of a business receives future earnings based on the business`s performance.
Usage and Context
Earnouts are used in business sales. They link the seller`s payment to the company`s future success. This way, buyers reduce risk, and sellers can earn more if the business does well.
Frequently asked questions
- What is an example of earnout? For example, a business is sold for $1 million upfront. Plus, the seller could get $500,000 more over 5 years if the business keeps growing.
- What is an earnout in a business sale? In a business sale, an earnout means the seller gets part of the payment later. This part depends on how well the business performs in the future.
- -
Benefits
Earnouts can make business sales smoother. Sellers can get more money if the business does well. Buyers pay less upfront and only pay more if the business succeeds.
Conclusion
Earnouts offer a way to agree on a business`s value. They help both buyer and seller. The seller gets rewarded for the future success, and the buyer reduces risk.
