Definition - What does Reverse Earnout mean?
A reverse earnout is used to close a valuation gap between a buyer and a seller. In a normal earnout, a certain amount of the purchase price is withheld to be "earned" by the seller after some time (usually 12 to 24 months) has passed post-transaction. The earnout is paid only if certain financial conditions are met such as delivering a pegged NTM EBITDA.
A reverse earnout works in the other way around. Rather than withholding some of the purchase price, the seller receives the entire amount at closing and must reimburse the earnout component if it fails to reach its post-transaction targets.
Divestopedia explains Reverse Earnout
Reverse earnouts are less common in practice since buyers don't usually like to use them. This is because they transfer the risk back onto the buyer.
Earnouts are traditionally difficult to enforce because many factors can come into play during the earnout period. Examples of these factors include the treatment of capital additions and disposals and their impact on EBITDA, sharing of resources between the buyer and seller, and how much credit the seller gets if additional market share or revenue has been collectively generated by both the buyer and seller.
By structuring a reverse earnout, the seller can claim its NTM EBITDA target was met once the earnout period expires. If the buyer disputes that the target was not met, or conditionally met with the support of the buyer, the onus in on the buyer, not the seller, to prove this position. Meanwhile, the seller has already been paid the full earnout amount.