Earnout / Earn-out is a business purchase arrangement in which the seller finances the business and the seller's payment is based on the earnings of the business.
For example, if a buyer and seller agree on the purchase price of a business as $750,000, the seller may agree to be paid back this price over a period of time, based on a percentage of the net profits/earnings of the business. The seller may establish a minimum earnings percentage for each year, or a minimum amount. The first year, the minimum might be 10% of net earnings before interest, taxes, depreciation and amortization (EBITDA), and no less than $150,000. The second year, the minimum might be $200,000, and so forth. The principle is that the better the performance of the company, the faster the seller-financed loan is paid off.
