What is an earn-out?
Part of the price paid later, conditional on performance. It is what a buyer proposes when they cannot price a risk — most often customer concentration or owner dependence.
Part of the purchase price paid later, conditional on the business hitting agreed targets. It is what a buyer proposes when they cannot price a risk — most often customer concentration, owner dependence, or a forecast that depends on something not yet signed.
Why it appears
An earn-out is not a negotiating tactic. It is a transfer of risk from buyer to seller, and it usually means a specific concern went unresolved. Identify which one, because the alternative to an earn-out is often fixing that concern before you go to market.
The terms that decide whether it pays out
- Measured on revenue, not profit — profit can be moved by the new owner's decisions
- A defined period, ideally 12–24 months rather than three years
- Written protection over resources: budget, staff, pricing authority
- Clear treatment of costs the buyer allocates to the business after completion
- Your own role and authority during the period, in writing
The third and fourth items are where earn-outs fail. If the buyer controls the budget and can allocate group overheads to your business, a profit-based earn-out becomes something they decide rather than something you earn.
The honest arithmetic
Assume you receive half. If the deal is still acceptable on that basis, the earn-out is a reasonable structure. If it only works when paid in full, you have accepted a lower price with extra steps.
What buyers look for covers the risks that produce earn-outs; common valuation mistakes covers presenting a pipeline as revenue, which is the fastest route to one.