Meaning
Quantitative benchmarks provide the measurement criteria for triggering deferred purchase price payments. These earnout hurdles usually focus on revenue or profit levels that the business must achieve within a set timeframe. Payouts occur only when the business satisfies these specific financial requirements.
The obligation ends once the maximum cap is reached or the measurement window expires.
Metric Selection
Profitability targets often create more difficulty for a founder than simple revenue goals. Revenue-based earnout hurdles encourage aggressive sales growth but can lead to a decrease in overall margin. Profit-based targets require the former owner to maintain strict control over expenses while the new parent company might be adding overhead.
Goals remain elusive. This conflict makes it very hard to hit the numbers while satisfying the new corporate rules.
Financial Resistance
Reaching the required numbers becomes harder when the market shifts or when the internal costs of the business increase. Earnout hurdles demand a high level of performance that often exceeds the historical averages of the company. A founder must expend considerable energy to push the team toward these goals while managing the integration process.
Measurement Window
Duration limits define the performance period. If the targets are missed within this timeframe, the payment is lost.
