An earnout is the method of paying the seller of a company based on that company’s future earnings. The earnout will call for additional payments to the seller if the company’s post-sale earnings reach a certain level.
The earnout is useful when buyer and seller do not agree about the company’s future profit stream. A buyer should be willing to pay a higher price for greater future profit, if realized, allowing the seller to get paid the company’s full value as the seller represented at the time of the deal.