Last updated: June 2026
Key takeaways
- An earnout ties part of your price to the company's performance after the sale.
- It is where sellers most often lose money, because targets and day-to-day control shift toward the buyer.
- Structure earnouts on metrics you control, with realistic targets and clearly written definitions.
- Cash at close is certain and earnout value is not, so negotiate the structure as carefully as the price.
What is an earnout?
An earnout ties part of the purchase price to the business hitting agreed targets after the sale, usually over one to three years. Instead of all cash at close, the seller receives a portion later, contingent on performance such as revenue, EBITDA, or specific milestones.
Why buyers use them
Earnouts bridge a gap in price expectations. When a buyer is not certain the company's growth will continue, an earnout lets them pay for that growth only if it materialises. Used well, it gets a deal done that might otherwise stall, and it can let a confident seller capture upside they would not have got in an all-cash deal.
Why they are risky for sellers
The risk is simple: after close, you may no longer control the levers the earnout depends on. If the buyer changes strategy, reallocates costs, or integrates your business into theirs, the targets can become unreachable through no fault of yours. Many earnouts are written so the seller never collects, and the dispute that follows is expensive and bitter.
How to structure a fair earnout
- Measure what you control. Tie the earnout to revenue or a metric you can still influence, not group profit the buyer can engineer.
- Keep the targets realistic. Base them on the plan you both believe, not a stretch case used to justify the headline price.
- Protect the operating environment. Negotiate covenants on how the business will be run during the earnout period.
- Define the accounting. Agree precisely how the metric is calculated, so it cannot be redefined later.
- Keep the period short. The longer the earnout, the more can change. One to two years is usually fairer than three.
Earnout versus upfront
All else equal, cash at close is worth more than a promise of cash later, because it carries no performance or counterparty risk. A larger upfront with a smaller, well-structured earnout is usually better for the seller than a low upfront with a large, fragile one. The mix is a negotiation, and it is one an experienced adviser runs for you.
Our policy on earnouts
Because earnouts are where sellers get hurt, LePrince Group does not take fees on earnout value you have not received. Our fee follows your money. It is one way our outcome-based model keeps our incentive aligned with yours, all the way through.