Earnout

The financial targets used in an earnout calculation may include revenue, net income, EBITDA or EBIT targets, and the selection of metrics also influences the terms and conditions of the earnout. Sellers tend to prefer revenue as the simplest measurement, but revenue can be boosted through business activities that hurt the bottom line of the company. On the other hand, while buyers tend to prefer net income as the most accurate reflection of overall economic performance, this number can be manipulated downward through extensive capital expenditures and other front-loaded business expenses. Some earnouts may be based on entirely non-financial targets such as the development of a product or the execution of a contract. ==Limitations==

Earnouts have several fundamental limitations. They generally work best when the business is operated as envisioned at the time of the transaction, and are not conducive to changing the business plan in response to future issues. In some transactions, the buyer may have the ability to block the earnout targets from being met. Outside factors may also impact the company's ability to achieve earnout targets. Because of these limitations, sellers often negotiate earnout terms very carefully. ==References==