Earnout
A deferred component of M&A purchase price, payable to the seller after closing only if the target business achieves specified financial or operational milestones during a post-closing earnout period. Bridges valuation gaps between buyer and seller.
An earnout is a deferred component of M&A purchase price, payable to the seller after closing only if the target business achieves specified financial or operational milestones during a post-closing earnout period. Earnouts bridge valuation gaps between buyer and seller, the buyer pays only if the business performs as the seller projected; the seller participates in upside that the buyer is unwilling to pay for upfront.
Common metrics
Revenue-based: earnout tied to gross revenue or specific product-line revenue over the earnout period. EBITDA-based: earnout tied to EBITDA targets, typically over 1–3 fiscal years post-closing. Milestone-based: earnout tied to discrete events (regulatory approval, customer count, specific contracts). Combination: some earnouts combine metrics to balance buyer and seller incentives.
Earnout disputes
Earnouts are a frequent source of post-closing M&A disputes. Recurring problems include: (1) buyer business decisions that reduce earnout metrics (deferred sales, product discontinuation, allocation of corporate overhead); (2) accounting interpretation disputes (especially around EBITDA adjustments); (3) integration choices that disrupt earnout-period operations; (4) implied covenant of good faith and fair dealing claims when buyer conduct appears designed to reduce the earnout.
Texas implied covenant of good faith
Texas does not generally recognize a freestanding implied covenant of good faith and fair dealing in commercial contracts. English v. Fischer, 660 S.W.2d 521 (Tex. 1983). However, post-closing earnout disputes frequently invoke express covenants (commercially reasonable efforts, ordinary course of business operations) or fraud / fraudulent inducement claims when buyer conduct departs sharply from expected behavior.
2024–2025 market trends
The ABA's 2025 Private Target Deal Points Study, which covers deals signed or closed in 2024 and the first quarter of 2025, reports that earnouts appeared in 18% of the deals studied, down from 26% in the 2023 study.
Earnout disputes are less likely where the metric is objectively measurable, the earnout period is short, and the agreement states how the buyer will operate the business during the period. Long, complex earnouts tend to produce more disputes.
Companion article: Selling Your Business in Texas