What is an incremental earnout?

An incremental earnout refers to a structure in which additional payments are tied to the performance of a business or investment over time, specifically contingent upon achieving certain profit increases from year to year. This approach provides a way for sellers to potentially earn more by meeting specific financial milestones, which aligns the interests of both the buyer and the seller. By establishing earnouts based on performance metrics, it allows both parties to share the risks and rewards that come with the business post-transaction.

In contrast, a flat payment agreement does not account for variable performance, thus eliminating the flexibility an earnout provides. An upfront payment for future developments focuses on immediate compensation rather than ongoing performance. A fixed-rate payment regardless of profits does not incentivize growth or improvement, failing to match the dynamic nature of business performance that an incremental earnout captures. Therefore, the definition of an incremental earnout precisely fits the option centered on conditional additional payments based on year-to-year profit increases.