Earnout Modelling Tool.

An earnout is a deal structure where a portion of the purchase price is paid after close, contingent on the business hitting agreed performance targets. It bridges valuation gaps between buyer and seller by tying future payments to actual results.

Earnouts work best when the business has strong forward momentum that the seller believes in but the buyer cannot fully price. They are common in high-growth SaaS, fintech, and digital media transactions where historical earnings do not reflect future potential. When pricing gaming transitions, average upfront cash structures alongside our iGaming deal metrics report (opens in a new tab) to identify hidden operational earnout traps.

Sellers face real risks: the buyer controls the business post-close and can influence whether targets are hit. Earnout disputes are among the most common sources of post-close litigation. Sellers should negotiate clear metric definitions, anti-sandbagging provisions, and independent audit rights before signing.

Earnouts are one of several ways to bridge a valuation gap. Compare them against vendor finance, rollover equity and deferred consideration in the Deal Structure Comparison, or model the full funding picture in the Capital Stack Builder.

The upfront payment is total deal value multiplied by the upfront percentage. Everything else is the earnout pool, split evenly across the earnout period to give a maximum annual payment. On a $10 million deal with 70% upfront over three years, $7 million is paid at close and up to $1 million is available in each of the three years.

Each year's target compounds from the base-year metric at the target growth rate, so a 20% growth target on $4 million of revenue means $4.8 million in year one, $5.76 million in year two and $6.91 million in year three.

The downside case assumes the business delivers 50% of each target and receives 50% of that year's payment. The base case hits target and pays in full. The upside case beats target by 30% but still pays the full annual amount, because most earnouts are capped at the agreed pool.

That cap is the asymmetry sellers underestimate: you carry all of the downside and only part of the upside. Negotiate an uncapped or tiered upside if you expect to outperform.

A dollar received in year three is worth less than a dollar at close, and it is also at risk of never arriving. The tool discounts each payment at your chosen risk-adjusted rate to give a present value. Rates of 15% to 25% are common for earnouts, well above a risk-free rate, because the seller no longer controls the business. Comparing present value to headline price shows what the offer is really worth today.

Revenue is the hardest metric for a buyer to manipulate after closing, which is why sellers prefer it. EBITDA is closer to what the buyer values, but it is exposed to cost allocations, integration charges and accounting policy changes the seller no longer controls. Customer count and retention suit subscription businesses, provided the definition of an active customer is written down precisely.

If the earnout is measured on EBITDA, the agreement has to specify which adjustments apply. A buyer who books integration costs, group management fees or new headcount against the acquired business can wipe out an earnout that would otherwise have paid. Freeze the accounting policies at completion and list the permitted adjustments, using the same definition of adjusted EBITDA (opens in a new tab) that set the price.

A shortfall against the working capital peg (opens in a new tab) reduces the upfront payment at completion, before any earnout is earned. Sellers who focus only on the earnout can lose several hundred thousand dollars on the peg. Agree the peg definition and a worked calculation at letter of intent stage, alongside the earnout terms.

• Operating covenants that stop the business being starved of resources
• Acceleration of the full pool on a sale, restructuring or breach
• Catch-up, so a missed year can be recovered by later outperformance
• Monthly reporting and audit rights, with an independent expert for disputes
• Set-off limits, so warranty claims cannot silently reduce earnout payments

An earnout is a form of contingent consideration (opens in a new tab). Buyers record it at fair value under IFRS 3 or ASC 805. Payments conditional on the seller staying employed can be treated as compensation rather than price, which may change how they are taxed. Take tax advice on the structure before signing.