An Earnout is a contractual term that states that the seller of a firm will receive more pay in the future if the business meets specific financial targets, which are typically expressed as a percentage of gross sales or earnings.
An earnout provision can be used if an entrepreneur trying to sell a business is asking for a higher price than a buyer is willing to pay.
Usually, it is dependent on financial success or other objectives.
The buyer can say, "We'll offer you an additional $20 million in 4 years if you can exceed $200 million in revenue by then."
Buyers use it to reward sellers for maintaining high performance and to deter management teams from accepting the money and leaving.