is a term used by private equity
and venture capital
investors to describe a formula by which management of a target company earn a bigger share of the target's share capital by achieving results above pre-determined levels. It is also used to describe a payment to shareholders
selling their shares in a company where the payment is based on the company's profits in a specified period, usually after the closing of the sale.
It is often used when small companies in high-growth, high-tech or service industries are sold. The acquiror typically pays 60–80% of the purchase price up front with the remaining 20–40% structured as an earn-out and paid out over time as the acquired company achieves certain levels of sales or profitability.