Earn-out clauses are common in business agreements, and they allow sellers to ‘earn’ a portion of the purchase price based on the success of the company after the deal closes. An earn-out term typically lasts between one and three years after the transaction date. 

Earn-out clauses are commonly included in sales for two main reasons:

1. 1. To reconcile differences in the purchase price anticipated between the seller and the buyer. Earned outs are a sort of ‘at risk’ compensation. The company will be rewarded by the vendors with a higher sale price if a great business result is produced. 
   2. Offer incentives to sellers who stick around after a deal has been made in order to keep the company moving forward.

Earn-outs have many benefits:

• The final sales price is tied to the seller’s and the buyer’s performance.
• It could help close a deal when a disagreement over price has stalled negotiations.
• If the earn-out is calculated in a clear and quantifiable way, there shouldn’t be any more large disagreement between the parties.
• When a company’s income is falling short, when there are innovative new projects underway, or when the company is experiencing rapid expansion, equity is created.
• The company can afford the additional sale price with the growth it has already achieved.

The success of an earn-out arrangement depends on the business potential and legal agreement. If done correctly, they can improve a company’s ability to maintain and pass on its success.