An earnout is a portion of the purchase price the buyer pays later, only if the business hits agreed targets after the sale (e.g., revenue or profit goals over the next one to three years). It bridges a gap when buyer and seller disagree on value by tying part of the price to actual results. Example: a $1,000,000 deal with $800,000 paid at closing and a $200,000 earnout paid only if the business keeps at least $250,000 of SDE next year.
A worked example
Say a seller wants $1,000,000 but you think the business is worth $800,000 because a big customer might churn. An earnout splits the difference: pay less now, pay the rest only if the risk doesn't materialize.
| Component | Amount | Condition |
|---|---|---|
| Cash at closing | $800,000 | Paid at close |
| Earnout (year 1) | $200,000 | Paid only if SDE ≥ $250,000 next year |
| Max total price | $1,000,000 | Seller earns the top end by hitting the target |
If the business performs, the seller gets full value and you paid a fair price. If it stumbles, you're not overpaying for performance that never showed up.
An earnout says: "I'll pay for the growth you promised, after I see it."
Earnouts and SBA loans
SBA financing has specific rules about contingent purchase-price payments, and a traditional performance-based earnout can be restricted or require careful structuring on 7(a) deals. Many SBA buyers achieve a similar effect with a seller note, sometimes on full standby, instead. Always confirm what's allowed with your SBA lender before relying on an earnout.
Watch the fine print
- Define the metric precisely, revenue vs. profit vs. SDE, and exactly how it's calculated.
- Address control, you run the business during the earnout; the seller may worry your choices lower the target.
- Set accounting rules and dispute resolution up front to avoid a fight at payout time.
This is squarely attorney and accountant territory, see do you need a lawyer to buy a business.
Frequently asked questions
A portion of the purchase price paid later, only if the business meets agreed targets after the sale, often revenue or profit goals over one to three years. It bridges a value gap by tying part of the price to actual results.
SBA rules on contingent payments can restrict traditional earnouts or require specific structuring on 7(a) deals. Many SBA buyers use a seller note, sometimes on standby, for a similar effect. Confirm with your lender first.
Disputes over how targets are measured, who controls the business during the period, and what counts toward the goal. Define the metric clearly, spell out accounting methods and operating discretion, and include dispute resolution.
