What is an earnout and when is it used in M&A?

Answer

, '$50M base price + up to $20M if EBITDA hits targets in years 1-3'). Earnouts are used when: (1) Buyer and seller disagree on valuation (typically the seller is more optimistic about future performance); (2) The founder/management team is staying and the buyer wants alignment; (3) The business has uncertain prospects (early-stage, milestone-dependent like biotech).