What is Earn Out?
An earn out is a contractual provision providing the seller of a business with the ability to obtain future compensation if the business achieves certain financial goals.
Why would a buyer agree to this?
A buyer may not be willing to pay the asking price of a new business or due to the risk involved in a business, and so may agree to an earn out clause in return for paying a lower purchasing price.
It eliminates uncertainty for the buyer, as they only pay a portion of the sale price upfront, and the remainder is based on future performance. The seller also receives the benefits of future growth which appeals to entrepreneurs.
By Victoria Wilson, LLB Law Student at the University of Keele and BeComAware Student Ambassador.
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