What is an earnout, and when would you use one?

Define it as part of the price paid after closing only if agreed targets are hit, used to bridge a valuation gap. Say where it fits, why disputes arise once the buyer runs the business, and how US GAAP records it.

Updated October 20, 2026

The numbers, step by step

Up to $30 million paid at the end of year two, a 50% chance of hitting the target, and a 10% discount rate.

Expected payout50% × $30 million

$15 million

Value today$15 ÷ 1.1^2

about $12.4 million

What the interviewer listens for

• Do you define it as contingent consideration paid after closing?
• Do you explain it as a bridge across a valuation gap?
• Can you name situations where it fits?
• Do you raise disputes over control and the choice of metric?
• Do you know the basic accounting?

Common mistakes

• Describing an earnout as a payment owed no matter what.It's paid only if the targets are hit.
• Ignoring disputes.The buyer runs the business after closing and can affect whether the targets are met.
• Saying it's recorded only when paid.Under US GAAP it's recorded at fair value at closing.
• Picking an easily moved metric like EBITDA without discussing it, when the choice of metric is the heart of the negotiation.

Likely follow-ups

• How is an earnout different from a seller note?A seller note is deferred payment the buyer owes regardless of performance, like a loan from the seller. An earnout is paid only if the targets are hit.
• Why might a seller resist one?It defers money the seller thinks it has already earned and depends on how the buyer runs the business, so sellers push for tight definitions and protections.

More finance technicals

• Tell me about a recent deal you've followed.
• What's the difference between an asset deal, a stock deal and a 338(h)(10) election?
• How does a buy-side M&A process work?
• How do you tell whether an acquisition is accretive or dilutive?
• Walk me through a merger model.

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