Earnout

[1] Earnouts are often employed when the buyer(s) and seller(s) disagree about the expected growth and future performance of the target company.

[3] Buyers usually value companies based on historical performance while sellers may weight more heavily projections about higher growth prospects.

With an earnout the seller's shareholders are paid an additional sum if some predefined performance targets are met.

Earnouts are popular among private equity investors, who do not necessarily have the expertise to run a target business after closing, as a way of keeping the previous owners involved following the acquisition.

On the other hand, while buyers tend to prefer net income as the most accurate reflection of overall economic performance, this number can be manipulated downward through extensive capital expenditures and other front-loaded business expenses.