When considering the sale of a business, “Earnout” might just be the bridge that makes a deal happen—or the cushion that keeps both parties happy long after the ink is dry.
What is an Earnout?
An earnout is a contractual agreement in which a portion of the purchase price of a business is contingent upon the business achieving specific performance targets after the sale.
In short, instead of the seller receiving 100% of the sale proceeds at closing, a portion is “earned” over time—usually based on financial metrics like revenue, EBITDA, or customer retention.
This can be a powerful tool for reducing risk, aligning goals, and bridging valuation gaps.
When and Why Are Earnouts Used?
Earnouts are most commonly used in deals where:
There's uncertainty about the future performance of the business.
The business relies heavily on the owner’s relationships or involvement.
The valuation is based on future growth or projections.
The buyer and seller disagree on what the business is worth today but agree on its potential.
You’ll frequently see earnouts in:
Professional services firms
Tech or IP-heavy companies
Healthcare and regulated industries
Founder-led companies where the seller agrees to stay on temporarily
Example: Win-Win in Action
Scenario: A boutique digital marketing agency is being acquired by a larger firm. The seller believes the business is worth $2.5M, while the buyer is comfortable paying only $2M due to concerns about client retention.
Solution: The buyer agrees to pay $2M at closing, plus an earnout of up to $500K based on revenue targets over the next 18 months.
Outcome:
The seller gets a path to their full valuation if performance holds.
The buyer mitigates their risk and incentivizes a smooth transition.
Both parties stay aligned during the handoff period.
Buyer & Seller Benefits
✅ For Sellers:
Opportunity to realize the full value of the business
A path to prove projections were accurate
Keeps them involved during a potentially lucrative transition
✅ For Buyers:
Risk mitigation if performance slips
Seller remains motivated post-close
Less cash outlay up front, freeing up capital
Pro Tips from the Field
Clear Metrics Matter: Define earnout triggers in black-and-white terms (e.g., “$X in revenue” vs. “increased market share”). Ambiguity = conflict.
Limit the Timeline: Most earnouts run 12–36 months. After that, they often lose effectiveness.
Don’t Overdo It: Earnouts should complement the deal, not control it. If too much value is pushed into the future, you risk losing seller motivation or making the deal less attractive.
Final Thoughts
Earnouts are not just clever deal mechanics—they’re relationship tools. When structured correctly, they reinforce trust and reward performance, which can be especially valuable in lower middle-market transactions.
If you're a business owner preparing to sell, understanding concepts like earnouts helps you walk into buyer conversations with confidence—and spot opportunities others might miss.
