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M&A Explained

What Is an Earnout?

A plain-English answer, and why it matters when you actually sell.

Short answer: An earnout is a portion of a business's sale price that is paid later, contingent on the business hitting agreed targets after closing, usually revenue or profit over one to three years. It bridges a gap between what a seller believes the business is worth and what a buyer will pay upfront, sharing future performance risk between the two.

Why Earnout matters when you sell

Earnouts show up when a buyer is not fully convinced the recent numbers will continue, or when the seller expects growth the buyer will not pay for today. Structuring one well is an art. The seller wants clear, achievable targets tied to metrics they can influence, protection against the buyer starving the business of resources, and a fair measurement method. A vague earnout is a lawsuit waiting to happen.

The key questions: what metric, over what period, measured how, and who controls the levers. WETYR structures earnouts so the targets are realistic and the measurement cannot be gamed, so the back half of your price is money you actually collect.

Frequently asked questions

Are earnouts good or bad for sellers?
Neither by default. A well-structured earnout can get you a higher total price; a poorly structured one becomes uncollectable. The terms, targets, and who controls the business afterward decide which it is.
How long do earnouts last?
Typically one to three years. Longer earnouts increase the risk that circumstances outside your control affect the outcome, so shorter and cleaner is usually better for the seller.
What metric should an earnout use?
A metric the seller can actually influence and the buyer cannot easily manipulate, often gross revenue rather than net profit, since a buyer controls the cost side after closing.

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