Startup Terms Glossary
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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