An earnout is deferred consideration paid if the business hits defined targets after closing; a seller note is financing the seller provides to the buyer. Both bridge valuation gaps and both shift risk to the seller. Their value depends on the metric, the period, the seller's control over the outcome, protections against buyer interference, and, for notes, the rate, term, security and subordination.
When an earnout makes sense
When buyer and seller disagree about the future and the seller believes in it, and when the seller will still influence the outcome after closing. When neither is true, an earnout is a discount with a delay.
The metric decides everything
Revenue is hardest for a buyer to manipulate; gross profit is next; EBITDA is easiest, because the buyer controls the costs. Choose the metric the seller can see and influence, define it in accounting terms, and specify who calculates it and how disputes are resolved.
Protections a seller should insist on
Covenants that the buyer will run the business consistently with past practice, will not divert customers or starve the unit of resources, will report the metric on a schedule, and will accelerate the earnout if the buyer sells the business or breaches the covenants.
Seller notes: the terms that matter
The interest rate, the term and amortization, the security (what the note is backed by), the subordination to senior lenders, and the default remedies. A note that is unsecured and subordinated to a large bank loan is a hope, not a payment.
Compare offers on the same basis
Model every offer as cash at close plus the risk-adjusted value of contingent and deferred consideration. A higher headline with a soft earnout is often worth less than a lower headline paid in full at closing.
