earnout
Earnout is a sale arrangement where part of the price for a business is paid later, only if the business hits agreed targets after the sale.
In plain English
Think of a man selling his suya spot to a bigger restaurant chain. The chain likes the business but is not fully sure the customers will stay loyal once the original owner steps back, so they offer him ₦20,000,000 now and a promise of another ₦10,000,000 in two years if the spot keeps making the same money without him standing there every evening.
That second payment, the one tied to future performance, is the earnout. It is the seller's reward for proving that the thing they sold was really as good as they claimed, and it is the buyer's way of not paying full price for a story that might not hold up once the founder walks away.
In Nigerian business sales, earnouts show up a lot in deals involving tech startups, agencies, and family businesses being sold to bigger groups. A founder selling a logistics startup in Lagos might get part of the price upfront and the rest spread over two or three years, based on whether the company keeps its delivery numbers and customer base.
In the United Kingdom, earnouts are common when private equity firms buy small consultancies or agencies whose value depends heavily on client relationships. The buyer wants the founder to stay a little longer and prove the clients will not vanish once ownership changes.
For someone in the diaspora eyeing a family business back home, an earnout can feel like a safety net. Maybe your uncle wants to sell his school chain but you are not sure the pupils and staff will stay under new management, so you agree to pay him most of the money now and the rest only if enrolment numbers hold steady for the next two sessions.
A woman sells her skincare brand for ₦50,000,000 total. She receives ₦35,000,000 at closing and the remaining ₦15,000,000 only if the brand's revenue over the next 18 months matches or beats what it made the year before the sale.
Questions people ask
What happens if the business does not hit the targets?
Then the seller simply does not receive the extra payment, or receives a smaller portion of it depending on how the agreement was written. This is why sellers should read earnout terms carefully before signing, since missed targets can mean losing a large part of the expected price.
Can a seller be tricked out of an earnout?
It happens more often than people admit, especially if the buyer controls how the business is run after the sale and can shift costs or delay revenue to make targets look unmet. Good earnout agreements include clear rules on how the business will be managed during the earnout period, so the seller is not left at the mercy of decisions they cannot influence.
Are earnouts only used for buying whole companies?
No, they can apply to smaller deals too, like buying a share of a business, acquiring a brand, or even certain property and asset sales where future performance is uncertain. Anywhere a buyer wants proof before paying in full, an earnout can fit.
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