Earnouts: Negotiating Acquisitions Where the Payment Is Contingent on Post-Acquisition Performance

Abstract

The study builds an analytical framework for structuring earnout deals for acquisitions that trade a lower upfront payment for future payments tied to the target’s post-deal performance (typically a percentage of revenue/turnover, sometimes with minimum and/or maximum transfer amounts). The study aims to supplement predominantly simulation-based prior work with tractable formulas. Using an asymmetric Nash bargaining solution, we derive closed-form conditions for the optimal upfront payment and the revenue-sharing rate when buyer and seller hold different beliefs about future turnover. We work through cases where either the buyer or the seller retains operating control, and then extend the model to include lower (floor) and upper (cap) bounds on total transfers, treating turnover as stochastic and illustrating with exponential distributions. The paper shows how these contractual levers shape percentage, upfront payment, and any floors/caps-shift with the parties’ optimism or pessimism and with the tightness of the bounds. It closes by outlining extensions (joint floors and caps, negotiated bounds, risk aversion, and misreporting incentives under information asymmetry).