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November 3, 2025
Earnouts vs. Contingent Payments: Key Differences
Earnouts are deferred purchase price tied to post-close business performance (e.g., revenue, EBITDA) to bridge valuation gaps and align incentives; sellers bear more performance risk and payouts follow precise formulas over 1–3 years. Contingent payments release only if non-performance conditions are met (e.g., key-customer retention, litigation/regulatory resolution), shifting risk based on the specific trigger. Both can affect tax and accounting treatment, so tight definitions, measurement methods, and dispute-resolution language are essential to avoid fights later.
