Earn-out
A contractual clause in an M&A transaction providing that part of the purchase price will be paid later, conditional on the acquired business meeting future performance targets such as revenue, EBITDA, or customer count.
In practice
An earn-out is useful when buyer and seller disagree on growth prospects: the seller believes in strong future performance, the acquirer is more cautious. The mechanism reconciles both views without blocking the deal. The pitfalls are significant: precise metric definition, accounting treatment during the transitional period, and risk of results manipulation by transition management. A well-structured earn-out covers 15 to 30 percent of the total price over two to three years.