A portion of the sale price paid later, contingent on the business hitting targets after close - typically 20-40% of consideration tied to 1-2 year revenue or EBITDA goals. The structural problem: you lose control of the business the day the deal closes, but your payout still depends on how it performs under someone else's decisions. The playbook's rule is blunt: cash at close beats an earnout. Price the deal on the cash at close and treat any earnout as upside, not value. The mistake is letting a fat headline number with a heavy earnout beat a smaller, cleaner all-cash offer.
Benchmark. Best case: no earnout. Second best: a small one with clear, measurable, achievable targets. If unavoidable, tie it to revenue rather than EBITDA (you cannot be accused of cooking EBITDA via discretionary spend) and include operating covenants protecting your ability to hit the target.