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Earnout

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What is Earnout?

Earnout (earn-out) is a type of business purchase arrangement. With this type of agreement, the seller offers financing to the purchaser. The purchaser then completes the sale by paying the seller a set percentage of business or startup earnings.

This usually happens over a period of several years. Because the payout is connected to business earnings, the purchase of the business happens more quickly when profits are high.

Earnout Examples:

Benefits to using an earnout purchase agreement include:

  • Example 1. Reduced need for upfront money to purchase a business
  • Example 2. Repayment is easier on the buyer during ‘slow years’
  • Example 3. Minimization of tax impact on the seller

This article also talks about earnout.

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