An earn-out is transaction consideration paid after closing if the business meets conditions defined in the purchase agreement.
Definition
For an engineering firm owner, an earn-out makes some of the transaction payment depend on results or events after closing. The agreement may tie payment to revenue, earnings, client retention, project milestones, or another defined measure. It should specify the calculation method, accounting policies, measurement period, payment timing, access to records, operating control, and dispute process. Buyers and sellers may measure performance differently, so definitions and responsibilities matter. An earn-out is not guaranteed cash at closing, and a stated maximum payment is not necessarily the amount a seller will receive. It is also distinct from rollover equity, which represents continued ownership investment rather than contingent purchase consideration. The terms determine how post-closing changes, including staffing or project assignments, affect the calculation. Owners compare the earn-out's conditions with their expected transition role and ownership transition plans.
How owners use it
- A seller models the earn-out separately from cash proceeds available at closing.
- The parties define which project revenue counts and how credits, write-offs, and timing are handled.
- If the agreement provides $100,000 for each of two achieved milestones, $100,000 + $100,000 = $200,000 maximum potential payment.
- The owner reviews who controls client relationships, staffing, and accounting inputs during the measurement period.
