An earnout is a portion of the purchase price paid to the seller after closing, but only if the business hits agreed targets (revenue, gross profit, or customer retention). It bridges the gap when a buyer and seller disagree on future performance by tying part of the price to results.
Example structure
| Component | Amount |
|---|---|
| Cash at close | $850,000 |
| Earnout, if Year 1 revenue ≥ prior year | $150,000 |
If revenue holds, the seller earns the extra $150,000; if a key customer walks, the buyer keeps it. Note: SBA deals limit how earnouts interact with the guaranteed loan, so structure carefully.
Why it matters when buying a business
Earnouts protect you against concentration risk and rosy seller projections without forcing you to overpay upfront. But they breed disputes, define the metric, the measurement period, and who controls the books precisely. In SBA-financed deals, a standby seller note is often a cleaner tool than an earnout.
