What Is an Earnout and How Do You Protect Yourself?

A founder’s guide to one of the riskiest (and most misunderstood) deal structures

When a buyer proposes an earnout, it often sounds like a win-win. They get comfort that future performance will meet expectations, and you get a potential upside if the business continues to perform well after the sale.

But earnouts can be one of the riskiest elements in a business sale, especially if you're no longer in full control post-completion. If poorly structured, they can lead to disputes, missed targets, and money left on the table.

What is an earnout?

An earnout is a mechanism where part of the sale price is contingent on the business hitting certain future targets, usually revenue, EBITDA, or other KPIs.

Example:

• Headline price: £5,000,000

• Upfront payment: £4,000,000

• Earn-out: £1,000,000 if EBITDA exceeds £1m in the next 12 months

Common earn-out structures

1. Fixed metric targets

   • E.g. “£500k payable if revenue exceeds £3m in 2025”

2. Tiered outcomes

   • More nuanced: £250k at £2.5m EBITDA, £500k at £3m, £750k at £3.5m, etc.

3. Percentage sharing

   • You receive a share (e.g. 30%) of profits above a certain level

Where earn-outs go wrong

1. You lose control

   • If you’re no longer a director or have limited operational input, hitting targets becomes harder

2. Ambiguous definitions

   • “EBITDA” must be tightly defined - adjustments, caps, and policies matter

3. No floor, no minimum

   • Without a guaranteed minimum, you’re carrying all the downside

4. Manipulated costs

   • Buyers may allocate additional costs to your division post-sale, reducing profitability

5. Timing misalignment

   • If earnout periods don’t match business cycles (e.g. delayed revenue or seasonality), you miss targets you otherwise would have hit

How to protect yourself

• Negotiate clear definitions: What exactly counts as EBITDA, revenue, or profit?

• Push for input rights: Even if you’re not in control, ask for consultation or oversight

• Request board observer status during the earn-out period

• Set a minimum earn-out or partial payment for baseline performance

• Cap discretionary costs: Ensure the buyer can’t overload your division with group overheads

When earn-outs work well

Earn-outs can make sense when:

• The business is growing fast but value is uncertain

• There's high confidence in future pipeline or contracts

• You're staying on and can directly influence outcomes

• They’re used to bridge a valuation gap, not replace a fair price

How Deal Clarity can help

We help sellers understand, structure, and de-risk earn-outs. Our fixed-fee advice includes:

• Reviewing the earn-out wording in Heads of Terms or the SPA

• Benchmarking typical structures in your sector

• Advising on where to push—and what’s commercially reasonable