Earnout
Also known as: Contingent Consideration, Seller Earnout
Definition
An earnout is a portion of acquisition consideration paid after closing if defined milestones are met. In technology deals, earnouts often address disagreement over growth durability, customer concentration, product delivery, or integration risk. Good earnouts are measurable, controllable, and hard to manipulate.
Earnouts can bridge a valuation gap, but they can also create post-close conflict if the metric depends on buyer decisions the seller cannot control. Revenue earnouts fail when pricing, staffing, product roadmap, or account ownership changes after close.
The operating test is simple: if the seller cannot influence the result and the buyer can change the rules, the earnout is not a bridge. It is deferred litigation risk.
Related terms
- Contract Value — The dollar value of a customer agreement, usually measured as ACV, TCV, or ARR depending on contract term and revenue model.
- EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. The proxy for operating cash flow that PE buyers use to set valuation multiples.
- Quality of Earnings (QoE) — An independent forensic analysis of a target's reported earnings, normalizing for one-time items, accounting choices, and revenue-recognition decisions. The diligence step that determines real EBITDA.
Where this gets applied
- Unit Economics — CAC payback, NRR, gross margin by segment, cohort analysis, paid-on-bookings vs. paid-on-cash.
- Exit Readiness — Pre-LOI cleanup. Financial reporting normalization, contract hygiene, IP assignment review, customer-concentration mitigation.
- Migration & Integration — Post-merger integrations that hold customer and staff retention. 95% / 100% achieved on complex divestitures.