Conditional consideration needs a payout rule.
An earn-out links additional purchase consideration to a later performance measure. This model represents one specific structure: a linear payout on performance above a hurdle, capped at a maximum amount.
Accounting definitions, buyer control, integration choices and dispute mechanisms often drive the real economics. A revenue hurdle and an EBITDA hurdle are not interchangeable, even when the payout arithmetic looks identical.
The formula, made clear.
- Performance measure
- One contractually defined amount for a stated measurement period.
- Payout cap
- Maximum additional consideration under this single tranche.
Put the numbers in context.
$4,000,000.00 performance against a $3,000,000.00 hurdle at 2× produces $2,000,000.00 earn-out, below a $5,000,000.00 cap. With $15,000,000.00 base consideration, total consideration is $17,000,000.00.
| Input | Example value |
|---|---|
| Guaranteed base consideration | $15,000,000.00 |
| Measured performance | $4,000,000.00 |
| Performance hurdle | $3,000,000.00 |
| Payout per unit above the hurdle | 2 × |
| Maximum earn-out | $5,000,000.00 |
| Conditional earn-out payment | $2,000,000.00 |
What this calculation assumes
One linear tranche and one performance period. No probability weighting, discounting, catch-up, binary thresholds, overlapping tranches, clawbacks or tax. Output is contractual scenario consideration, not fair value.
What to consider next.
Compare downside, hurdle and cap scenarios. Discounting and probability assessment require a separate, explicit framework.
How we approach financial models →