Earn-Out Protection: How to Protect Your Position as a Seller

Earn-outs are increasingly common in UK business sales. They allow part of the purchase price to be paid later, based on future performance, but they also introduce significant risk for sellers.

This article explains what an earn-out is, where the dangers lie, and how to approach earn-out protection from day one.

What Is an Earn-Out?

An earn-out is a deferred and conditional payment. Instead of receiving the full price upfront, the seller receives a portion later, if the business hits agreed targets.

Example:

• £2 million paid at completion

• £1 million paid over two years if profit or revenue targets are met

If those targets are not achieved, the seller may receive a reduced amount, or nothing at all.

Why Sellers Need to Be Cautious

Earn-outs can increase the total price, but they also shift risk from the buyer to the seller. The key issue is control. After completion, the seller no longer runs the business, but still depends on its performance.

Common risks include:

• The buyer changes how the business is run

• Costs or revenue are moved between group companies

• Staff or clients are lost

• Financial metrics are redefined

• The buyer sells the business before the earn-out period ends

These scenarios are hard to challenge unless the earn-out is well protected.

Earn-Out Protection: Key Steps for Sellers

1. Define Metrics Clearly

Agree precise definitions of EBITDA, adjusted profit, or revenue. Confirm:

• How they will be calculated

• Which accounting standards will apply

• Any exclusions or adjustments

2. Limit the Buyer’s Discretion

Include protections that prevent the buyer from harming performance through avoidable changes. For example:

• Cutting key costs

• Withholding investment

• Allocating central overheads unfairly

3. Include Minimums or Partial Payouts

Negotiate:

• A minimum guaranteed payment

• A sliding scale or partial payment structure

• Thresholds for performance that trigger some level of payment

4. Secure Oversight and Access

Ask for:

• Regular management accounts

• Performance updates

• Oversight or audit rights during the earn-out period

5. Plan for Early Exit or Ownership Change

Include provisions that protect the seller if the business is sold or merged during the earn-out. In some cases, this may trigger automatic or accelerated payments.

Should You Avoid Earn-Outs?

Not always. They can help bridge a valuation gap, especially where the buyer is cautious about future growth. Some earn-outs are well-structured and pay out in full.

What matters is clarity, enforceability, and control.

Final Thought

An earn-out is not a bonus. It is part of the price and deserves serious negotiation. Sellers who focus only on the upfront figure may find out too late that they have given up value without protection.

If you are reviewing an offer that includes an earn-out, now is the time to get advice.