During a recent M&A negotiation, a client came across the term “Earnout Payments.”

In simple terms, an earnout is when a buyer pays part of the purchase price upfront (XXX) — and agrees to pay an additional amount (YYY) later only if the acquired company meets certain performance targets.
These targets are often tied to EBITDA, revenue, or gross profit or Non-financial milestones — e.g. achieving a regulatory approval, launching a product, obtaining a key contract; depending on what both parties negotiate.

Earnouts are useful when the buyer and seller have different views on future business performance — meaning they don’t fully agree on valuation today.
So instead of forcing one side to compromise entirely, they lock in an upfront price first, and if the company performs as expected, the seller receives the remaining payout.

📌 In short:
Upfront payment = guaranteed.
Earnout payment = performance-based.

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