The Exit Toolkit · Sheet 14 of 20
How earn-outs really work
And why they often cause pain
What an earn-out is
Part of your price is tied to the business's performance after completion. Hit the agreed targets and you receive the balance later.
Why buyers use them
They bridge valuation gaps. If a buyer doubts your forecasts, they defer payment until the results prove them.
Why sellers agree
An earn-out can lift the headline price and keep you motivated through transition. But it delays your full reward and shifts risk onto you.
Where it goes wrong
After completion the buyer controls the business. Priorities change, costs get allocated differently, targets drift, and disputes follow.
How to protect yourself
Define the metrics precisely, keep the earn-out period short, ask for more upfront, and write in obligations on the buyer to run the business so the targets can actually be hit. Decide whether you need to stay involved in management to protect it.
The reality check
Many earn-outs never pay in full. Value the deal on the guaranteed money and treat the earn-out as a bonus.
Bottom line
An earn-out is a bet on a business you no longer control. Sometimes it is the right bet, but make it with your eyes open and your lawyer's drafting tight.
General information only, not legal advice. Steven Mather Solicitor is a trading name of Kesters Nook Limited; legal work is carried out through Nexa Law Limited, authorised and regulated by the SRA (number 633024).