How to Leverage Earnouts in M&A Deals: A Seller’s Guide to Maximizing Profit

Selling a business is rarely a clean-cut transaction. Even when both sides are motivated, one of the biggest hurdles in an M&A deal is agreeing on what the business is truly worth.

Buyers want to avoid overpaying for uncertain future performance, while sellers want to be rewarded for the full potential they’ve built, mainly if that potential hasn’t fully materialized yet.

That’s where earnouts come in. When used strategically, an earnout can bridge the gap between what a buyer is willing to pay upfront and what a seller believes the business is worth in the long run. It offers a chance to maximize the total payout, but only if the deal is carefully structured and clearly understood.

What Is an Earnout?

An earnout is a deal structure where part of the sale price is paid after the transaction closes, but only if the business hits specific performance targets. Instead of receiving the full amount upfront, the seller receives a portion later based on how the company performs, usually over one to three years.

This gives both sides flexibility while still allowing the seller to benefit from future growth.

Earnouts are especially common when:

• The buyer and seller disagree on valuation: Sometimes the seller believes the business is worth more than current financials suggest, especially if future growth is expected. An earnout lets the seller prove the value after the sale and earn additional compensation accordingly.
• The business is still growing or scaling: Companies might not have consistent profit margins in high-growth industries like healthcare and technology. An earnout structure allows buyers to tie part of the payment to tangible, measurable results, while sellers still benefit from the future success they’ve helped shape. This is a strategy commonly seen in deals managed by a healthcare business broker.
• There’s uncertainty about future performance. Buyers may be cautious in industries affected by economic swings, market shifts, or regulatory changes. Earnouts let them commit to a deal without betting everything on uncertain forecasts.

Sellers often accept earnouts for several reasons:

• The chance to increase your total payout: If your business performs well after the sale, you may earn significantly more than what you’d get in an all-cash deal. For some sellers, this can mean hundreds of thousands or even millions in additional earnings.
• Reassure buyers who are hesitant: Buyers may be more willing to move forward if they know part of the price is tied to real-world results. This added flexibility can be the key to closing a deal that might otherwise fall apart.
• Can smooth out tough negotiations: When both sides have different views on what the business is worth, an earnout allows both sides to focus on measurable future performance, reducing tension in the negotiation.

How to Set Up an Earnout That Actually Pays Off

Too often, sellers sign off on terms that sound reasonable, only to discover later that the business can’t hit the targets, the buyer’s decisions reduce performance, or the contract leaves too much open to interpretation.

If you’re relying on an earnout as part of your sale, you need more than optimism; you need safeguards, clarity, and strategy. This is where sellers either protect or forfeit real money.

Here’s how to make sure your earnout delivers what it promises:

1. Negotiate Realistic, Measurable Targets

Earnouts are only as strong as the goals they’re tied to. If the targets are vague or too ambitious, even a well-run business can fall short. That’s why you need performance goals that are both clearly defined and grounded in what the company can reasonably achieve.

When setting targets, consider:

• Use metrics that can be objectively tracked: Stick to data you can pull from regular financial reports like gross revenue, EBITDA, or units sold. These metrics reduce confusion and prevent disputes over how success is measured. Avoid anything subjective, like “increase brand presence” or “expand reach.”
• Base your numbers on actual past performance: Review historical data to see what’s realistic over the next 12–36 months. For example, if your business grew 10% per year for the past three years, expecting 40% growth next year likely won’t hold up under scrutiny.
• Create flexibility through tiered structures: Instead of a single “all-or-nothing” goal, build partial payouts to reach 80% or 90% of the target. This helps ensure you’re rewarded even if things fall just short due to market shifts or other factors beyond your control.

2. Build in Protections Against Buyer Control Risks

Here’s the reality: you won’t be running the business after the sale. But your earnout depends on how well it performs, and whether the buyer’s decisions will drive performance. If they change direction, reduce investment, or integrate your company into something larger, your earnout could suffer despite the business having potential.

In deals involving tech companies, where integration and pivots are standard, a seasoned technology business broker often advises sellers to include safeguards that keep the earnout fair and achievable. These may include:

To reduce this risk, structure protections such as:

• Operational consistency requirements: The contract should include clauses that prevent major changes to the way the business runs, such as halting product lines, changing key leadership, or cutting marketing, unless agreed to or documented. Without this, your payout could hinge on choices you can’t influence.
• Minimum investment levels: If performance depends on funding for growth, the buyer is required to maintain baseline spending on areas like staffing, advertising, or R&D. If they scale back, the earnout’s conditions become harder to meet through no fault of their own.
• Segregation of performance data: If your company is merged into a larger group, ensure the earnout is based on your business unit’s numbers, not combined with others. This prevents underperformance elsewhere from dragging down your results.
• Right to monitor key activity: This could be quarterly performance reports or a simple clause that lets you review progress. Even without operational control, visibility gives you leverage and peace of mind.

READ ALSO: Key Questions to Ask Your Business Broker Before Signing a Contract

3. Get It in Clear and Specific Writing

Verbal understandings don’t survive ownership transfers. And vague contract language, even with good intentions, can create loopholes, slow payouts, or cause legal disputes. If you want to be paid, your agreement needs to be airtight.

When drafting the earnout agreement, insist on clarity around:

• How each metric is defined: If revenue is the performance target, define whether that’s gross or net, and if it’s calculated before or after returns, discounts, or affiliate fees. Leave nothing open to interpretation.
• What reporting will be shared and when: Spell out how often performance updates will be delivered, in what format, and by whom. If the buyer controls the data, you need to know how and when you’ll receive it.
• When payouts will occur: Will the earnout be paid annually? Quarterly? After hitting each milestone? Put the schedule in writing with specific dates or performance periods.
• How disputes will be handled: In case of disagreement, the contract should outline how issues are resolved, whether through mediation, a third-party audit, or legal action. This protects you if numbers or reporting practices are ever challenged.

Common Earnout Pitfalls and How to Avoid Them

Many pitfalls of earnout aren’t about the paperwork. They’re about expectations, timing, and mindset.

Here’s what to watch for once the ink is dry:

• Disconnecting Completely After the Sale: Once the business is sold, some owners want a clean break, no emails, updates, or involvement. You don’t need to stay on as an operator, but keeping a communication line open helps you understand what’s happening and why. Sellers who vanish often miss early signs of trouble they could’ve helped address.
• Getting Emotionally Attached to the Outcome: Sellers often tie their identity and legacy to the performance of the business after the sale. When results don’t go as planned, even for reasons outside anyone’s control, it can feel like a personal failure. This can lead to frustration, tension with the buyer, or unnecessary conflict.
• Failing to Reframe What Success Looks Like: Many sellers see a full earnout payout as the only version of a “successful sale.” But the initial payment is often the real win, the earnout is a bonus based on future growth under new leadership. If you see the earnout as extra rather than expected, you’ll be better positioned to handle whatever comes. Shifting this perspective early on can make the entire experience more stable and less stressful.

Need Help Structuring a Smart Earnout?

An earnout can unlock greater value in your business sale, but only if it’s structured with clarity, protection, and strategy. At Lake Country Advisors, our seasoned business brokers help owners navigate complex M&A transactions, focusing on long-term success, not just short-term numbers.

From negotiating deal terms to structuring performance-based payouts, our team ensures your interests are protected and your upside potential is fully realized. We combine financial insight, legal coordination, and hands-on deal experience to help you build an earnout agreement that actually works and pays.

Thinking about selling or reviewing an offer? Contact us today to schedule a confidential consultation.