Earn-Out Clause
Also called: Earnout Provision · Deferred Consideration
An earn-out clause makes part of an acquisition's purchase price conditional on the acquired business hitting specific future performance targets — commonly revenue or profit milestones over one to three years post-acquisition. It bridges a valuation gap when buyer and seller disagree about what the business is really worth.
In more detail
Earn-outs are most common when a buyer is skeptical of a seller's growth projections but the seller believes strongly in them — rather than negotiating a single number, the price splits into a certain upfront payment and a conditional future payment tied to actually hitting the projected performance.
The clause is a frequent source of post-acquisition disputes, because the buyer typically controls the business during the earn-out period — meaning the buyer's operational decisions can directly affect whether the seller's earn-out targets are met, creating a real conflict of interest.
A well-drafted earn-out defines the metric precisely, specifies how the business will be operated during the earn-out period (protecting the seller from the buyer deliberately suppressing performance), and sets a clear dispute-resolution process for calculating the final figure.
A company is acquired for ₹5 crore upfront plus an earn-out of up to ₹3 crore if the business hits ₹10 crore in revenue within 24 months post-acquisition. The seller's founders remain involved in operations during that period, with contractual protections against the buyer deliberately diverting business away from the acquired unit.
What our lawyers check
- How precisely the earn-out metric is defined and measured
- Operational protections preventing the buyer from suppressing earn-out performance
- The dispute-resolution process for calculating the final earn-out figure
- What happens to the earn-out if the seller's key people leave before the period ends
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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