Earnout

Earnout

Earn out is a variable part of price paid for a company. Price paid for a company, i.e. for owning the company's equity (usually shares) can be either fixed or variable. The most common and basic part of the fixed amount is cash at closing (of the transaction). When one buys publicly listed shares, a fixed price paid in cash at closing is usually the only possible. On the other hand, in private transaction, a more complicated way of price structure is possible to negotiate. A part of price that is not fixed, but variable, is based on a pre-agreed formula using variables to be known only in the future. This variable part is commonly referred to as an Earn-out. (the selling shareholders who are often the top management team management are "earning-out" part of the price, because they need to work hard to achieve so that the earn-out is paid, hence the term) The most common variable used are future profits, i.e. part of the price paid will be directly determined based on the future profits the company achieves and paid only at that future time.