Legal Definitions - earnout agreement

An earnout agreement is a type of agreement used in the sale of a business. In this agreement, the buyer pays an initial amount upfront, but the final purchase price is determined by the business's future profits. The seller may also help manage the business for a period after the sale.

Let's say that John wants to sell his small business to Jane. They agree on a purchase price of $500,000, but they also include an earnout agreement. The earnout agreement states that Jane will pay John an additional $50,000 if the business's profits increase by 10% in the next year. John agrees to help manage the business for the next year to ensure its success.

In this example, the earnout agreement allows Jane to pay a lower upfront cost for the business, while also incentivizing John to help ensure the business's success in the future.