How Earnout Structures Work — And When They Actually Make Sense
Key Takeaways
- An earnout lets you get paid more if the business hits certain targets after the sale
- They're most common when buyer and seller disagree on what the business is worth
- Earnouts can be very profitable — or very frustrating — depending on how they're structured
- The details matter enormously: what's being measured, who controls the outcomes, and what happens if the buyer changes direction
You've agreed on most of the deal, but there's a gap. You think the business is worth $2.5M. The buyer thinks it's worth $2M. Neither of you is completely wrong — you just have different views on what the next two years will look like.
This is where an earnout comes in.
What an earnout is
An earnout is an agreement where you receive additional money after closing if the business hits specific financial targets — usually revenue or EBITDA goals for the one to three years following the sale.
The basic structure: buyer pays you $2M at closing, plus up to $500K over the next two years if the business hits agreed benchmarks. If the business performs, you get your full $2.5M. If it doesn't, you got $2M.
When earnouts make sense
Earnouts work best when the gap between buyer and seller is about the future, not the present. They're also common when the seller is staying on post-close — if you're staying involved and confident in the trajectory, an earnout lets you participate in the upside you're helping to create.
Where earnouts go wrong
The problem usually isn't the structure — it's the specifics.
What gets measured matters. Revenue is easy to track but easy to manipulate. EBITDA is more meaningful but subject to accounting decisions the new owner controls.
Who controls the business matters. If you're no longer running day-to-day operations, you're depending on the buyer to make decisions that support the earnout targets.
How to protect yourself
If an earnout is part of your deal, make sure the following are clearly defined in writing: the specific metric and exactly how it's calculated, operational covenants limiting what the buyer can change, a clear dispute resolution process, and an acceleration clause if the buyer sells or makes major changes before the earnout period ends.
Earnout provisions can add significant value to your deal — or create years of headaches. We help you structure them correctly from the start.
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