An earnout is a provision in a business sale agreement that allows the seller to receive additional payment above the closing price if the business hits specified performance targets after the sale. Earnouts are used to bridge price gaps between sellers who believe the business will grow and buyers who are not yet convinced — they allow both parties to share in future upside.
When Earnouts Make Sense
Earnouts are most appropriate when: the business has a credible growth story that has not yet been proven in the trailing financials, there is a significant price gap between seller expectations and buyer offers, the seller will remain involved post-close in a role that allows them to influence performance, and the earnout metrics are clearly defined and easily measurable.
Earnout Risks for Sellers
Earnouts favor buyers when they are structured loosely or when the seller cannot control the outcomes. A seller who receives a $500,000 earnout contingent on revenue that a new owner's operational decisions will affect is taking real risk. Key questions: Who controls post-close marketing and pricing decisions? Is the earnout metric revenue, gross profit, or EBITDA? What accounting standards govern the measurement? These details determine whether the earnout is realistic or illusory.
Illinois sellers should treat any earnout with scrutiny. The better deal is always a higher closing price with no earnout — but when that is not achievable at acceptable terms, a well-structured earnout with clear metrics, short duration (2–3 years max), and seller participation in the driving decisions can be a fair resolution.