earn-out
An earn-out is a deal term where the seller receives part of the sale price later, based on how the business performs post-acquisition.
An earn-out is a deal structure where the seller receives part of the sale price over time—only if the business hits specific targets after the acquisition. It links payment to future performance, often through revenue, profit, or customer growth milestones. The goal: reduce risk for the buyer and keep the seller engaged post-close.
This mechanism appears often in acquisitions where the business is founder-led, performance is hard to forecast, or the buyer wants to protect against overpaying. It can bridge valuation gaps and align incentives—but only when structured clearly.
Where earn-outs make sense
A strategic buyer acquires a DTC brand for $20M, with $15M paid upfront and $5M tied to hitting $10M in revenue within 18 months. If the target is hit, the founders receive the full payout. If not, they forfeit the final tranche. The structure protects the buyer while giving the seller upside.
In another case, a SaaS company is acquired based on ARR growth. The earn-out rewards the founding team with equity bonuses if they hit 30% growth in the first year. It’s not just about paying for the business—it’s about rewarding continued momentum.
What people get wrong about earn-outs
Some sellers treat the deferred portion as guaranteed. It’s not. Unless the conditions are met—and clearly defined—it won’t get paid. Others draft vague performance targets that create tension later. A lack of precision leads to disputes, misalignment, and legal costs.
Buyers, on the other hand, sometimes use earn-outs as negotiation leverage without intent to pay. That erodes trust and damages integration. A good earn-out needs fairness, clarity, and enforceability.
Alignment is power—when it’s built in
An earn-out aligns goals when trust alone isn’t enough. It balances risk and reward, delays part of the payout, and ties value to execution. But it only works when both sides commit to the terms—and when the targets reflect what success really looks like after the deal is done. That’s not just structure. That’s strategy.
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