Earnouts can be a very effective condition to an offer when buying a business however, they don’t apply to every business for sale. So what exactly are earnouts and when should they be used?
An earnout is when a percentage of the purchase price or an agreed upon amount is paid to the seller at some point in the future, depending upon the business achieving certain milestones or conditions. For example, if the sales of the business hit a pre-determined level within an agreed upon time, the seller gets an additional payment. Now, this doesn’t only apply to sales; it could be a wide array of milestones having to be met, so let’s discuss the more common scenarios when earnouts make sense.