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Understanding Earnouts: How They Work and When to Use Them
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When selling a business, you want clarity, certainty, and cash at close. But sometimes, the buyer’s vision of value doesn’t match yours. That’s where earnouts come in.
An earnout is a deal structure where part of the sale price is paid out later, only if the business hits specific performance targets after the sale. It can help bridge valuation gaps — or become a source of frustration if poorly structured.
Here’s what you need to know.
What Is an Earnout, Really?
An earnout is a contingent payment. You get paid more only if the business performs the way the buyer hopes it will. Think of it as “bonus money” tied to future success — usually measured in revenue, EBITDA, or net income.
It’s common in deals where:
- The business is scaling rapidly
- The seller will stick around post-sale
- There’s disagreement about future potential
Key Parts of an Earnout
What has to happen for the earnout to trigger — typically revenue, EBITDA, or net profit.
How long performance will be tracked — usually 12 to 36 months.
One-time bonus? Multiple installments? It all depends on how it’s negotiated.
Limits the buyer’s risk and the seller’s upside. Caps = maximum payout. Floors = guaranteed minimum.
Who’s running the business post-close? How is performance tracked and verified? If it’s not clear in writing, you’re asking for conflict.
Why Sellers Like Earnouts
If your business performs, you could walk away with significantly more.
Earnouts give you skin in the game without full ownership — especially if you're staying on as GM or in an advisory role.
Why Sellers Should Be Careful
You don’t run the company anymore. And your payout depends on someone else’s decisions.
If metrics aren’t clearly defined, you’re setting up future conflict.
Why Buyers Like Earnouts
They only pay the “full price” if the business performs.
Keeps the seller engaged post-close, especially during the handoff period.
Why Buyers Need to Watch It
The need to hit earnout targets can distort decision-making or create tension with new staff.
More legal work, more tracking, more chances for misalignment.
When Earnouts Make Sense
arnouts aren’t for every deal. But they can work well when:
- There’s a big valuation gap
Earnouts help buyers and sellers meet in the middle without overcommitting. - The seller is critical to the business
Think personal client relationships, niche expertise, or founder-led sales. - The business is in growth or transition mode
If you’re projecting a major year or turnaround, an earnout can protect both sides. - The market is uncertain
Earnouts shift risk onto performance instead of blind optimism.
How to Structure an Earnout That Doesn’t Blow Up
- Use Clear Metrics
“EBITDA” must mean the same thing to both parties. Spell it out. - Be Realistic
Set targets that are actually achievable based on current trends — not just hope. - Define Reporting Standards
Who prepares the financials? How often? What access do you have? - Plan for Disputes
Include a dispute resolution clause: mediation, arbitration, etc. - Agree on Post-Close Control
Will the seller still influence performance, or not? Get it in writing.
Bottom Line
Earnouts can be a smart tool when used strategically — but they’re not magic. They can unlock extra upside for a seller and lower risk for a buyer, if they’re structured clearly and with mutual trust.
At Exits + Acquisitions, we don’t blindly recommend them. But when the right deal calls for one, we know how to structure it tight — no surprises, no vague metrics, no unnecessary friction.
Have questions?
Let’s talk. Confidentially, and with no pressure.
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