In an earnout, a portion of the purchase price is contingent on the target company's future performance. It helps bridge valuation gaps between the buyer and seller by tying payment to specific financial or operational milestones. Earnouts typically have a predefined time frame, and payments are made when the agreed-upon goals are met. This structure can reduce the buyer's risk, especially in cases where future performance is uncertain or difficult to predict.

However, earnouts can also lead to disputes if the parties disagree on the achievement of milestones or if the acquired business underperforms. For that reason, it’s important to carefully negotiate earnouts carefully and keep them as simple as possible to avoid disputes.