Earnouts . . .
refer to acquisitions or leveraged buyouts in which
the purchaser, usually management, finances part of the company’s
purchase price by borrowing from the seller. In the purest form of the
arrangement, the purchaser is required to pay the earnout portion of
the purchase price only from the profits of the company. If the
company does not earn enough profits under the new owners to pay off
the seller, the seller may become entitled to take the company back,
receive certain minimum payments, or increase the purchase price. The
term earnout is also used to refer to venture capital financings in
which a portion of the funding is provided by a loan that is repaid
only from company profits. See:
LBO (Leveraged Buyout),
MBO (Management Buyout).