In an earn-out, the purchaser agrees to make post-closing payments for a period of time contingent on the performance of the business or specific property ing to certain thresholds. These thresholds are commonly based on financial metrics, such as gross revenue or net profit over a period of time.
Balance Sheet: Earn-Outs are recorded as “Contingent Consideration,” a Liability on the L&E side. Income Statement: You record changes in the value of the Contingent Consideration here, i.e. if the probability of paying out the earn-out changes, you show it as a Loss or Gain here.
The Earnout is recorded as a contingent liability on the Balance Sheet.
Types of Earnouts Earnouts are payments to the target that are contingent on satisfying post-deal milestones, most commonly the target achieving certain revenue and EBITDA targets. Earnouts can also be structured around the achievement of non-financial milestones, such as winning FDA approval or winning new customers.