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based on a variety of nonfinancial measures. Examples of contractually defined benchmarks include, but
are not limited to, the following:

 Gross revenue

 Net revenue

 New clients generated

 Number of units sold

 Inventory levels

 Regulatory approval for a new product

 Cash flow measures, such as earnings before interest and taxes (EBIT) or earnings before inter-
est, taxes, depreciation, and amortization (EBITDA)

 Gross profit

 Net income

 Others

The source of the target’s measured performance may also vary. Examples of how contractually defined
revenue benchmarks may vary depending on the source include, but are not limited to, the following:

 Revenue derived from services and products that currently exist

 Revenue derived from products that are to be developed in the future and that are related to the
current seller’s products

 Revenue derived from any sale of products or services to any current customers of the seller as
of the closing

 Revenue derived from a particular division or subsidiary of the seller’s business

The earnout adjustment can be calculated using a variety of different formulas. The earnout adjustment
could be paid based on achieving a contractually defined benchmark, a percentage of performance, a
multiple of performance, or other formulas. For example, assume that a buyer and seller agreed on a
contractually defined benchmark for an earnout adjustment to be net income in the threshold amount of
$5 million prepared in accordance with generally accepted accounting principles (GAAP). One earnout
provision (scenario A) may provide for an additional payment of $500,000 if the threshold amount is
met. Another earnout provision (scenario B) may provide for an additional payment of $4 for each dollar
of net income in excess of the threshold amount. Assuming that the buyer and seller agree on the calcu-
lation of the net income, and the net income achieved was $6 million, in scenario A, the buyer would
pay $500,000 to the seller as the earnout adjustment (that is, a fixed payment based on achieving net in-
come of $5 million). Alternatively, in scenario B, the buyer would pay $4 million [that is, $6 million–$5
million=$1 million; $1 million x 4=$4 million] to the seller as the earnout adjustment. The latter scenar-
io is often employed when the buyer bases its purchase price on a multiple of earnings. The additional

© 2020 Association of International Certified Professional Accountants 41