What it is
An earn-out is a deal structure in which a portion of the purchase price is not paid at closing. Instead, it is paid later if the business meets certain agreed-upon goals after the sale. Those goals are written into the purchase agreement.
Earn-outs are often used when a buyer and seller see the future of the business differently. A seller may feel the company's growth prospects are strong, while a buyer may want more proof before paying for them. The earn-out can serve as a bridge between those views.
The goals are commonly tied to measures such as revenue, profit or other milestones, though the specifics vary widely from deal to deal. How those measures are defined, tracked and protected is usually where the details matter most.
How it’s traditionally been approached
Traditionally, an earn-out sits alongside other parts of the purchase price, such as cash at closing, and sometimes other forms of deferred or contingent payment. The mix depends on the buyer, the seller, the industry and the circumstances of the business.
Earn-outs are often discussed in strategic sales and private equity transactions, and they may come up in other exit routes as well. Each side typically has its own priorities, so the terms are commonly negotiated at length. Sellers often want clarity and control, while buyers often want flexibility to run the business as they see fit.
Common topics in these negotiations include how performance is measured, the length of the earn-out period, who makes operating decisions during that period, how disputes are resolved, and how accounting practices are handled. Because earn-outs can have legal and tax consequences, they are typically reviewed by licensed professionals.
How the right exit advisor may help
The right deal structure advisor may help you understand how an earn-out could fit into your overall exit goals. They may explain the tradeoffs between certainty at closing and potential upside later, and help you think through what role you want after the sale.
A first conversation is generally about your goals, your timeline preferences, your business and what matters most to you in a transaction. An advisor may walk through how earn-outs have commonly been structured and where disagreements tend to arise. No outcome, buyer interest or deal term can be promised.
Questions you might ask: How is the advisor compensated? What experience do they have with contingent payment structures? How might performance measures be defined clearly? What protections might a seller consider? Which licensed attorney or CPA should review the terms? Advisors in the directory are independent and responsible for their own licensing, so it's wise to verify their credentials yourself.
The bigger picture
Selling a business is often one of the biggest financial and personal decisions a person makes. An earn-out can extend that experience, because part of your outcome may depend on a business you no longer fully control. Some owners find that uncertainty stressful, while others feel energized by staying involved.
It can help to consider how you'd feel about waiting for part of your payment, working under new ownership, and managing the gap between expectations and reality. Talking with trusted professionals, family and supportive peers may bring peace of mind. If you're a health or wellness professional weighing a practice sale, Providers.plus offers additional resources.
Keep in mind
- This page is educational only and is not legal, tax or investment advice.
- Confirm any decision about an earn-out with your own licensed attorney, CPA or financial advisor.
- Earn-out payments depend on future performance and are never guaranteed.
- The Post-Exit Playbook is an independent directory and does not vouch for any individual advisor's qualifications.
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Go to Exit Optimization →Frequently asked questions
How do earn-outs work in a business sale?
An earn-out makes part of the purchase price contingent on the business meeting agreed goals after closing. The goals, measurement methods and payment timing are written into the purchase agreement. Specific terms vary widely, so a licensed attorney and CPA should review them.
Why would a buyer ask for an earn-out?
A buyer may request one to share the risk of paying for future performance that isn't yet proven. It can help bridge a gap between what a buyer and seller each believe the business will do. Whether it suits a particular deal depends on the parties' goals.
What are earn-outs typically based on?
Earn-outs are commonly based on business performance measures such as revenue or profit, though other milestones are possible. How each measure is defined matters a great deal. Clear definitions can help reduce disagreements later.
What are the risks of an earn-out for a seller?
A seller's later payments may depend on factors they no longer control, such as how the new owner runs the business. Disputes over measurement can also arise. Payments are not guaranteed, which is why sellers often seek professional guidance on the terms.
Do I stay involved in the business during an earn-out?
Sometimes, but it depends on the agreement. Some sellers remain in a role during the earn-out period, while others step back. How much influence a seller has over operations is typically a negotiated point.
How can a deal structure advisor help with business exit planning?
A deal structure advisor may help you understand how earn-outs and other payment structures fit into your business exit planning goals. They may explain common tradeoffs and questions to raise with your attorney and CPA. They cannot guarantee any sale outcome, buyer interest or terms.
Educational resource. The Post-Exit Playbook shares general information and connects people with independent exit advisors. It is not professional advice. Talk with a qualified professional about your own situation.