Earn-Out
Private Equity glossary · Private Equity Fundamentals
Definition
A form of deferred purchase consideration contingent on post-closing performance.
Earn-Out in plain English
When someone sells their company, the buyer and seller often disagree on what it's worth — the seller swears it'll keep growing, the buyer is skeptical. An earn-out settles the argument by splitting the difference over time: the buyer pays part of the price up front, and promises to pay the rest later ONLY if the business actually hits agreed-upon results (like a certain sales or profit level). It's like buying a used car and saying, 'I'll pay you the last $2,000 in a year, but only if it's still running great.' This keeps the seller motivated and protects the buyer from overpaying for promises that don't pan out.
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