What Is an Earn-Out and When Should I Push Back on One?

What Is an Earn-Out, Exactly?

Part of the purchase price is paid after completion, contingent on the business hitting agreed performance targets (Sprintlaw). Earn-out periods commonly run 6, 12 or 24 months, sometimes longer. The metrics are usually revenue, EBITDA or net profit, customer retention, renewal of key contracts, or specific milestones. Payouts are often structured on a sliding scale: part paid at a lower threshold, say 80% of target, the full amount at 100% or more, sometimes capped.

Why Would a Seller Agree to One?

• It bridges a genuine gap between what the seller believes the business is worth and what the buyer will pay with certainty today.
• It signals confidence. A seller willing to be paid on future performance is telling the buyer the forecast is real.
• It can reduce the buyer's upfront financing need, which sometimes gets a deal done that a straight cash sale would not. If you are the one financing the purchase, see our piece on funding a deal without property security.

Where Should You Push Back?

• Vague metric definitions. "Revenue" and "profit" need precise rules on GST, timing, deductible expenses, refunds, bad debts and related-party transactions, written into the contract, not assumed (Sprintlaw).
• Buyer control after completion. A buyer who owns the business can change pricing, staffing, suppliers or systems in ways that lower the result. Push for conduct protections: operating in the ordinary course, retaining key staff, no deliberate suppression of the metric.
• Weak information rights. Get defined reporting, access to records, and a real verification right, such as an accountant's inspection, written into the agreement.
• Set-off against warranty claims. Check whether the buyer can deduct indemnity or warranty claims from the earn-out before it is paid. If so, the process and limits need to be in writing.
• No dispute process. Push for clear timeframes, an independent expert for accounting disagreements, and a rule on who pays the costs of a dispute.
• No protection if things change. What happens if the buyer resells the business, the seller dies or becomes incapacitated, a key contract is lost, or the business is restructured. Each of these needs an answer in the contract, not an assumption.

When Should You Push Back Harder, or Walk Away?

• The earn-out covers more than about half the purchase price, with a long runway and no cap on buyer conduct.
• The metric definitions are not in the draft contract yet, only described verbally.
• You have no information or audit rights once the business changes hands.
• There is no dispute resolution mechanism named in the agreement.
• The buyer's own financial position raises doubt about whether they could actually pay the deferred amount.

Frequently Asked Questions

What is an earn-out in a business sale? An earn-out is part of the purchase price paid after completion, contingent on the business hitting agreed performance targets, commonly measured over 6, 12 or 24 months against metrics like revenue, EBITDA or customer retention.

Why would a seller agree to an earn-out instead of taking cash upfront? It can bridge a genuine gap between what the seller believes the business is worth and what the buyer will pay with certainty today, and it signals to the buyer that the seller's forecast is credible.

What's the biggest risk in an earn-out for a seller? Losing control. Once the sale completes, the buyer runs the business, and decisions on pricing, staffing or systems can lower the very metric the earn-out is measured against, often without the seller having any say.

What should always be in writing before signing an earn-out? Precise definitions for the metric being measured, limits on how the buyer can run the business during the earn-out period, the seller's right to verify the numbers, whether warranty claims can be set off against the payment, and a named dispute resolution process.

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This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not legal advice. Speak with a TransformBiz adviser and your lawyer before acting on anything here.

Sources: Sprintlaw, earn-out agreements in Australian business sales