Here’s what business sellers need to know about how earnouts work.

In every business sales contract, there’s something called an earnout. What is this, and how will it affect the sale of your business? Let’s talk about it. 

When a buyer purchases a business, they usually want a downside protection. So if they give you an offer for about $10 million, they might add a clause that says if your profits hit a certain benchmark within a year, you’ll receive another $1 million, and so on.

Why do buyers suggest these clauses? Essentially, buyers want your business to perform as advertised, and earnouts are insurance to make sure that happens. If it doesn’t, they’ll receive a bit of a discount on their purchase. 

Usually, earnouts require you to have 10% growth in the first year and 10% to 15% in the second year. Before agreeing to one, make sure the benchmarks are realistic and achievable.

If you have questions about this topic or anything else, please call, email, or visit our website. We look forward to hearing from you!