If a buyer offers you a great headline price and a chunk of it is an earn-out, the number on the first page is not the number to focus on. The clauses that decide whether you ever see that money are.
They exist to bridge a price gap. You value the business on where it’s heading; the buyer will only pay for what’s already proven. An earn-out splits the difference: a base price at closing, and the rest paid out if the business hits agreed targets over the next one to three years. It lets an optimistic seller and a cautious buyer shake hands.
After closing, the buyer controls the company. Their decisions — what they invest in, how they allocate costs, whether they push your product or their own — drive the very numbers your payment depends on. That’s the tension the entire earn-out clause has to manage. Every point below is really about protecting your number from decisions you’ll no longer be making.
Whether your earn-out is measured on revenue, gross profit, or EBITDA changes everything. A revenue target is harder for a buyer to manipulate but ignores profitability. An EBITDA target is more “real” but exposes you to the buyer’s cost allocations, overhead charges, and accounting choices — a few management fees pushed down from the parent and your profit-based earn-out quietly disappears. Whatever the metric, define it precisely and lock the accounting method it’s calculated on.
This is where good earn-outs are won. Negotiate how the business will be run during the earn-out period: kept as a distinct unit so its results can be measured, marketing and staffing maintained at agreed levels, no loading of parent-company costs onto your books, and a commitment to run it in good faith or to an agreed budget. Without these protections, a buyer can lawfully starve the business and defeat the earn-out without ever breaching the contract.
Spell out how and when performance is measured, who does the calculating, and your right to see the numbers and dispute them. Deal with acceleration: what happens if the buyer resells the business, terminates you, or breaches — ideally the remaining earn-out comes due. And consider negotiating a floor: a guaranteed minimum so you’re not entirely at the mercy of the targets.
Often you’re staying on as an employee during the earn-out, which ties two contracts together. Make sure being let go doesn’t forfeit money you’ve effectively earned, and that your employment terms and the earn-out don’t work against each other. Buyers don’t always connect these two documents; you should.
Earn-outs aren’t traps by nature — plenty are paid in full. But they reward the seller who negotiated the fine print and punish the one who trusted the headline. If there’s an earn-out in your deal, that fine print is exactly where a lawyer earns their fee.
Twenty minutes, no charge — a straight read on where you stand.
Book a 20-Minute Call