What Is an Earnout in M&A?

An acquisition can be a significant exit opportunity for private investors, but the headline purchase price does not always tell the whole story. In some deals, part of that price may be structured as an earnout, meaning sellers only receive the additional amount if the company meets certain milestones after closing.

Earnouts can help buyers and sellers agree on a price when they value a company differently, but they can also affect how much investors ultimately receive. In this week’s blog, we look at how earnouts work, why they are used, and what they can mean for private investors.

What Is an Earnout in M&A?

In mergers and acquisitions (M&A), an earnout is a provision that ties part of the purchase price to the company reaching certain goals after the deal closes. The buyer pays an initial amount at closing, with additional payments if the company hits agreed-upon milestones. These can include financial targets, such as revenue or earnings, or other goals like product launches, regulatory approvals, or unit sales.

For example, assume a company is acquired for up to $150 million. The buyer may pay $100 million at closing, with another $50 million available if the company reaches certain revenue targets over the next two years. While the deal may be described as being worth “up to $150 million,” only $100 million is guaranteed at closing.

Why Do Buyers and Sellers Use Earnouts?

Earnouts are often used when buyers and sellers disagree on a company’s valuation. In the example above, the sellers may believe the company is worth $150 million based on its growth prospects, while the buyer is only willing to pay $100 million based on its current performance.

Rather than walking away from the deal, the parties could agree to $100 million upfront and another $50 million if the company reaches its revenue targets. This gives sellers the chance to receive the higher price while limiting how much the buyer pays before that growth is realized.

When an Acquisition Price Can Be “Gold-Plated”

Earnouts can make an acquisition look more valuable than it ultimately is for shareholders. Acquisition announcements often highlight the maximum potential deal value, even when a portion depends on future milestones.

Using the same example, the deal could be announced as an acquisition worth “up to $150 million,” even though $50 million depends on future performance. If the company misses its earnout targets, shareholders may receive only the $100 million paid at closing.

That distinction matters because earnouts are not guaranteed. According to SRS Acquiom, 59% of deals paid at least some of the earnout, while earnouts achieved about 21 cents on the dollar.[i]  In the above example, while the deal may be worth up to $150 million, it’s possible the shareholders ultimately only receive $110.5 million if the resulting earnout achieves that 21 cents on the dollar. For investors, the headline acquisition price may therefore overstate what shareholders ultimately receive.

How Earnouts Typically Play Out

After an acquisition closes, the company enters an earnout period where its performance is measured against agreed-upon targets. These may include revenue, EBITDA, profitability, customer growth, or product milestones. SRS Acquiom’s 2025 Deal Terms Study found that 68% of deals with earnouts included multiple earnout metrics.[ii]

How the earnout is structured can also affect the payout. Some deals pay shareholders as milestones are reached, while others require the company to hit a specific threshold before any additional payment is made. Earnouts can also be measured and paid over set periods, such as annually for two or three years after an acquisition.

The buyer also controls the business after the acquisition. Changes to spending, staffing, pricing, or strategy can affect whether earnout targets are reached, making the terms of the acquisition agreement especially important.

What Can an Earnout Mean for Private Investors?

For private investors, an earnout can affect both the timing and value of an exit. If part of the deal depends on future milestones, investors may receive less at closing, with additional payments coming months or years later. An earnout tied to modest revenue growth may also be more achievable than one requiring aggressive profitability or several operational milestones.

Earnout payments may not be distributed pro rata among all shareholders. Depending on the deal terms, certain payments may be tied to founders or employees remaining with the business or allocated differently across shareholder classes. As a result, an investor’s share of the upfront purchase price may differ from their share of future earnout payments. Investors should consider both the conditions attached to an earnout and how any future payments would be allocated.

The Details Matter

Investors should consider the metrics used, how achievable the targets are, the length of the earnout period, and how much control the buyer has over the company after closing. Earnouts can also lead to disputes. According to SRS Acquiom, earnouts are contested at least 28% of the time.[iii] A larger earnout tied to difficult targets may ultimately be worth less to shareholders than a smaller one with more achievable terms.

Final Thoughts

Earnouts can help buyers and sellers reach a deal when they disagree on valuation, while giving shareholders the chance to receive more if the company performs well.

For private investors, the headline acquisition price is only part of the story. How much is paid upfront, what portion is tied to an earnout, and how achievable those terms are can make a meaningful difference in what shareholders ultimately receive.

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Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Navigating Exit Strategies: IPOs, M&A, and Secondary Buy-Outs
• How Startups Can Prepare for an Acquisition: Detailed Playbook for Founders on the M&A Process
• Understanding Equity Deal Terms
• Learning From Failed Startups