Assuming you are the PE fund, both promise to compensate the counterparty in the future if the business is performing but ratchet deals with the management whereas earnouts deal with the seller of the firm.
Ratchet aligns the interests between mgmt and shareholders.
Earnouts let PE fund avoid paying too high takeover price now and link the purchase price to future business performance.
Instead of paying out previous owners, you pay out and earn them out.
Ratchet makes sure the mgmt is working hard for shareholders. It’s like they are a plumber or something lol
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