Buyers and sellers often disagree on value: the seller is confident about the future, the buyer is cautious. An earn-out is a common way to bridge that gap — a portion of the purchase price is deferred and paid only if the business hits agreed targets after completion.
How an earn-out works
Part of the consideration is paid upfront; the remainder becomes payable over a defined period — usually one to three years — if the business achieves specified metrics, most often revenue or EBITDA. It lets the buyer pay for performance and the seller share in the upside they believe in.
Where earn-outs go wrong
- Vague or poorly defined targets that invite disputes
- The seller losing control of the levers that drive the metric
- Accounting definitions that shift the goalposts
- Misaligned incentives during the earn-out period
Getting it right
A well-drafted earn-out is precise about the metric, the measurement, and how the business will be run during the period. Experienced advice at the negotiation stage is what turns an earn-out from a source of future conflict into a fair bridge between two views of value.