Corporate Earnout When selling your company, an earnout agreement can seem like an attractive option--but things could get ugly if you're not careful.

It's time to sell your business. You've found a buyer, and you're negotiating the terms of the sale. But there's a problem. While you predict triple-digit growth over the next three years, the buyer doubts your projections and refuses to pay more than a percentage of your asking price. The company's valuation is up in the air.

Enter the "earnout" agreement, a contract where the seller gets paid a percentage of the asking price and agrees to meet specific financial goals over a period of time to earn more money. For example, the buyer might agree to pay 90 percent of the company's purchase price upfront, with another payout contingent on fulfilling a three-year plan. An earnout agreement allows the seller and the buyer to compromise on what they feel the company is worth. Earnouts are also used when the buyer needs the seller to stick around to maximize company performance after the acquisition.

Earnouts are an attractive option in the post-dotcom era, where the focus has shifted from promising projections to post-acquisition performance. "Buyers aren't paying for potential anymore, not upfront. But they will pay for potential realized post-acquisition," says Dave Kauppi, president of Mid Market Capital, a Hinsdale, Illinois, business brokerage that works on mergers and acquisition deals.