Not All Earn-Outs Are Equal

You've found a buyer for your business. But they're not willing to pay your full asking price today. They believe in the future, they say, just not enough to write the cheque for it. So they propose an earn-out. You've heard the term. You nod. But there's more than one version of this deal structure, and which one you're signing matters more than most sellers realize.

An earn-out is a clause in a purchase agreement where part of the purchase price is deferred and paid only if the business hits certain targets after the sale closes. Instead of $2 million on closing day, you might get $1.4 million now and up to $600,000 over the next two years if revenue or profit goals are met. The buyer limits their risk. The seller gets a path to full value , that is if performance holds.

What drives earn-out disputes isn't the concept. It's the details. How are the targets measured? Who controls the decisions that affect those numbers after you've handed over the keys? If the buyer cuts your marketing budget, changes your pricing, or folds your brand into theirs, your earn-out metrics can collapse through no fault of your own. A well-drafted earn-out defines the targets precisely, sets rules for how the business must be operated during the earn-out period, and gives the seller visibility into the financials.

The other version. A reverse earn-out flips the logic. Here, the seller receives a higher price upfront. But they will have to pay the money back if the business underperforms after closing. Instead of earning into the full price, you start there and risk giving some of it back. This structure can work well when the buyer and seller genuinely disagree on value and both have confidence in the business. The seller accepts downside exposure as a signal of their own belief in the numbers.

The benefit of a standard earn-out is protecting the buyer from overpaying for projected performance. The benefit of a reverse earn-out is giving the seller top-dollar access on day one while still aligning incentives. Neither is inherently better. Both are only as good as the contract behind them.

Your move. Before you agree to any earn-out structure, map out what you can and cannot control once you're no longer running the business day-to-day. Then have a lawyer review whether the draft agreement protects those assumptions or quietly exposes you to someone else's decisions.

If you have more than one shareholder and no agreement, treat it as your next priority ahead of the logo, ahead of the website. Sketch out what you’d each want to happen in these four scenarios (exit, sale, deadlock, death/disability), then have a lawyer turn it into an enforceable document. Expect it to cost less than a single month of the dispute it prevents. 

The price in the headline is only real if the contract makes it so.