When a buyer and seller can't agree on what a business is worth, an earnout bridges the gap — paying part of the price later if the business hits its targets. The details decide whether it works.
When a buyer and seller can't agree on what a business is worth, an earnout often bridges the gap. Part of the purchase price is paid up front, and the rest is paid later — if the business hits agreed targets after closing. Earnouts are common in deals where future performance drives value, including technology and service businesses. They also generate more post-closing disputes than almost any other deal term, because the details are easy to get wrong. Here's how to structure one that actually works.
Why Earnouts Exist
A seller believes the business is worth more than a buyer will pay up front, usually because of expected future growth. An earnout lets the seller capture that upside if it materializes, while protecting the buyer from overpaying for performance that never arrives. Done well, it aligns both sides. Done poorly, it sets up a fight.
Define the Metric Precisely
The single most important term is what the earnout is measured against — revenue, gross profit, EBITDA, unit sales, or a product milestone. Each invites different gaming. "Revenue" is simple but can be inflated with unprofitable sales; "EBITDA" is harder to manipulate but easier to dispute because it depends on accounting choices. Whatever you pick, define exactly how it's calculated, in writing, with examples.
Buying or selling a business with an earnout? We structure and negotiate earnout terms for deals across Arizona, California, and Texas.
Book a Free Consultation →Address Who Controls the Business
After closing, the buyer usually controls the company — which means the buyer controls the very performance the seller's payment depends on. This is the heart of most earnout disputes. A seller should negotiate protections: covenants requiring the buyer to operate the business in good faith, limits on decisions that would suppress the earnout metric, and access to the records needed to verify the calculation.
Plan for Acceleration and Exit
What happens if the buyer sells the company, shuts down the product line, or terminates the seller during the earnout period? Without acceleration clauses, a seller can lose the earnout through no fault of their own. Spell out what triggers immediate payment and how the amount is determined.
Cap, Floor, and Dispute Resolution
Consider whether the earnout has a maximum (a cap), a guaranteed minimum (a floor), or a sliding scale. And because earnouts produce disputes even when well drafted, include a clear mechanism for resolving disagreements over the calculation — often an independent accountant — so a dispute doesn't automatically become litigation.
An earnout is a powerful tool for getting a deal done when valuation expectations differ, but the value is won or lost in the drafting. Our M&A practice helps both buyers and sellers structure earnouts that hold up.
Frequently Asked Questions
Most earnouts run one to three years after closing. Shorter periods reduce the window for disputes but may not capture the growth a seller is counting on; longer periods do the opposite.
Both, when structured fairly. The buyer reduces the risk of overpaying; the seller captures upside they couldn't get in the up-front price. The terms determine who carries more risk — which is why the drafting matters so much.
Because the buyer controls the business after closing but the seller's payment depends on that business's performance. Disagreements arise over how the metric was calculated and whether the buyer operated the business in a way that fairly gave the earnout a chance to be met.