Earn-out
Short definition
An earn-out defers part of the price to a post-close target (EBITDA, sales, cash). It spreads disagreement over time and creates an accounting-definition and control fight.
Detailed explanation
If metric, GAAP policy, one-offs and the buyer’s operating freedom are not locked, the earn-out becomes a dispute. The buyer can starve investment to miss the target; the seller can inflate with aggressive accruals.
In valuation the earn-out is a contingent liability. The cash outflow is a maturity wall separate from the close cheque.
Why it matters for the CFO
Parking a price gap in “we will settle later” poisons integration. If the metric is EBITDA, a non-cash add-back war starts.
How to read it
Earn-out PV is probability × cash × discount. If the accounting definition is vague, PV is too optimistic.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.