Earn-Out

Definition

Deferred acquisition payments contingent on the target company hitting future performance metrics, bridging valuation gaps between optimistic sellers and skeptical buyers. It's 'prove it and we'll pay more.'

Example Usage

The acquisition included a $20 million earn-out payable if revenue exceeded $50 million in each of the next three years.

Origin

Became common in M&A practice in the late 20th century

Fun Fact

Earn-outs frequently lead to lawsuits as sellers claim buyers deliberately sabotaged performance to avoid payment, while buyers claim sellers inflated projections—trust is scarce.

Source: Mergers and acquisitions terminology

Related Terms

Beginner

Unearned Revenue

Another term for deferred revenue—cash received for work not yet performed, sitting on the balance sheet as a liability. It's having money in hand while owing labor, the service industry's constant state.

💰 Finance / Accounting

Beginner

working capital

Current assets minus current liabilities—the money available to fund daily operations without selling the furniture. Positive working capital means you can pay your bills; negative means start selling that furniture.

💰 Finance / Accounting

Intermediate

accrued liabilities

Expenses that have been incurred but not yet paid or formally billed—money you owe but haven't written a check for yet. They lurk on the balance sheet as a reminder that obligations don't disappear just because the invoice hasn't arrived.

💰 Finance / Accounting

Intermediate

tangible book value

A company's book value after stripping out intangible assets like goodwill and patents—basically what's left if you only count things you can drop on your foot. It's the pessimist's version of book value that assumes intangibles are worthless.

💰 Finance / Accounting

Advanced

cash conversion cycle

The time between paying suppliers and collecting from customers, measured in days. Negative is magical—you get paid before paying bills, turning working capital into a profit center. Positive means you're funding your customers' purchases with your own money.

💰 Finance / Accounting

Intermediate

cherry picking

Selectively choosing favorable data points while ignoring unfavorable ones, or choosing which trades to allocate to which accounts after seeing results. It's the art of making anything look good through strategic omission.

💰 Finance / Accounting

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