What is a base period earnout?

A base period earnout refers to a specific arrangement in a business transaction where additional payments are made based on the performance of the entity being acquired over a defined period. This approach typically ties the earnout to measurable performance metrics, such as revenue or earnings, achieved during that set time.

In the context of option C, "earnout based on additional payments made every year in excess of the balance due on purchase price," the key component is that these payments are contingent upon the business achieving certain benchmarks or performance criteria beyond what was initially agreed upon in the purchase price. This creates an incentive for the seller to perform well after the sale, aligning their interests with the buyer's goals for the company's success.

In contrast, calculating inventory and regular dividends to shareholders do not relate to the performance-driven nature or structure of an earnout. Fixed payments would not align with the flexible performance-based nature of a base period earnout, where the exact amount and occurrence of additional payments can vary depending on the success of the business post-transaction. Thus, the focus of a base period earnout is fundamentally about incentives tied to ongoing performance.