Earnout

An earnout is a portion of the purchase price tied to the business’s performance after closing. Instead of paying everything up front, the buyer pays more later if agreed targets are met. An earnout can bridge a gap between what a seller expects and what a buyer will commit to today, but it changes the certainty, timing, and risk of the seller’s proceeds, because part of the price depends on future results.

Why does Earnout matter in a Canadian SME sale?

Earnouts show up in Canadian SME deals when a buyer and seller see future performance differently. They can keep a deal alive that would otherwise fall apart over price. The catch is that the seller often stays exposed to the business after giving up control of it, and disputes over how targets are measured are common. Clear, written definitions of the targets matter as much as the size of the earnout.

How does Earnout affect your marketable range?

An earnout is a structuring tool, so it affects how proceeds are shaped rather than the underlying earnings. It can let the headline price reach a higher figure while shifting risk and timing onto the seller. When reading a marketable range, it helps to separate what is supportable with reasonable certainty at close from what depends on hitting future targets. Both are part of the picture, but they are not equally certain.

A simple earnout example

Suppose a seller wants $1,200,000 and a buyer will commit to $1,000,000 today. They might agree to $1,000,000 at closing plus a $200,000 earnout if revenue targets are met afterward. The figures only illustrate how an earnout bridges a gap. They are not a benchmark, a market norm, or advice.

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Related terms: Vendor Take-Back (VTB), Owner Dependency.

Frequently asked questions

Is an earnout guaranteed money?

No. An earnout depends on meeting agreed targets after closing, so part of the price is uncertain and paid later. If the targets are missed, that portion may not be paid.

When does an earnout make sense?

When the buyer and seller disagree about future performance. An earnout can bridge that gap and keep a deal together, while shifting some risk and timing of the proceeds onto the seller.

ProvenX provides an indicative marketable range based on owner-confirmed inputs and Canadian benchmark assumptions. It is not a formal valuation, appraisal, or business brokerage service, and it is not legal, tax, accounting, or investment advice. Any example figures are illustrative arithmetic, not benchmark claims or guarantees of price. Speak with a qualified professional before making decisions about selling your business.