An earn-out is part of the price paid later, only if the business hits agreed targets.
When earn-outs make sense
When buyer and seller disagree about future performance: a recent growth spike, a new product, or revenue that depends on the seller’s relationships.
How to structure one
- Clear, measurable targets (revenue or gross profit, not vague goals)
- A short period, often 6 to 24 months
- Who controls the business and budget during the period
- How and when payments are calculated and paid
What sellers should watch
Treat earn-out money as uncertain. Compare offers on cash at closing: $600k plus a $400k earn-out is not a $1M offer.
What buyers should watch
Avoid targets you cannot influence, and agree reporting that both sides trust.