An earnout is the most elegant way for a buyer to say "I don't believe your numbers." It is wrapped in optimistic language — "performance-based consideration," "contingent payment," "alignment of interests." But stripped of the packaging, an earnout is a bet. The buyer bets the business won't hit its targets under new ownership. The seller bets it will.

In practice, the buyer wins that bet more often than not.

A 2024 analysis by GF Data — which tracks middle-market M&A transactions — found that earnouts were included in 28% of deals and that sellers received the full earnout payment in fewer than 40% of those transactions. More than half of all sellers with earnout provisions received less than the full amount. Some received nothing.

The earnout exists to bridge a valuation gap. The seller believes the business is worth $10 million. The buyer believes it is worth $7 million. Neither is wrong — they are simply applying different assumptions about the future. The earnout resolves the impasse: the buyer pays $7 million at closing and agrees to pay an additional $3 million if the business achieves specified performance targets over the next two to three years.

On paper, this seems fair. The seller gets the full price they wanted, provided the business performs as they projected. The buyer gets downside protection — they only pay the premium if the performance materializes.

In practice, the structure creates misaligned incentives that almost always favor the buyer.

The moment the deal closes, the buyer controls the business. They control spending. They control hiring. They control strategy. They control the very levers that determine whether the earnout targets are hit.

A buyer who redirects the business's best salespeople to a different division has not violated the earnout agreement. A buyer who increases overhead allocation to the acquired unit — reducing its standalone profitability — has not violated the earnout agreement. A buyer who changes the go-to-market strategy in ways that depress short-term revenue while building long-term value has not violated the earnout agreement.

Each of these actions makes perfect business sense for the buyer. Each of these actions makes it less likely the seller will receive the earnout payment. The seller has no operational control, no ability to influence the outcome, and limited legal recourse unless the earnout agreement specifically prohibits the buyer's actions — which it almost never does in sufficient detail.

If an earnout is unavoidable — and sometimes it is, particularly in high-growth businesses where the seller's projections genuinely exceed what the buyer can underwrite — the negotiation must focus on three elements.

First, the metrics must be revenue-based, not profit-based. Revenue is harder for the buyer to manipulate through accounting decisions, cost allocations, or operational changes. If the earnout is tied to EBITDA, the buyer can reduce EBITDA through any number of legitimate actions. If it is tied to gross revenue, the measurement is cleaner and less susceptible to management discretion.

Second, the agreement must include operational protections. The seller should negotiate provisions requiring the buyer to maintain minimum staffing levels, marketing spending, and operational investment in the acquired business during the earnout period. These "covenant" provisions are difficult to negotiate and imperfect in enforcement, but they provide meaningful protection against the most common forms of earnout erosion.

Third, the earnout period should be as short as possible. A one-year earnout creates twelve months of uncertainty. A three-year earnout creates thirty-six months of uncertainty — plus thirty-six months during which the buyer's strategic decisions can diverge from the conditions that would trigger payment. Push for twelve to eighteen months. Accept twenty-four months only if the metrics and protections are strong.

Before accepting an earnout, explore the alternatives. Seller financing — where the seller lends a portion of the purchase price to the buyer at market interest rates — transfers less risk to the seller than an earnout because repayment is not contingent on performance.

An equity rollover — where the seller retains a minority stake in the business post-acquisition — aligns interests more genuinely than an earnout because the seller participates in the full upside, not just a capped contingent payment.

A consulting agreement — where the seller remains involved for twelve to twenty-four months at an agreed compensation rate — provides income during the transition and gives the seller some influence over the business's direction during the critical post-closing period.

And sometimes, the right answer is to accept a lower guaranteed price rather than a higher uncertain one. A $7 million check that clears is worth more than a $10 million promise that depends on someone else's decisions.

The earnout is not inherently unfair. It is inherently risky for the seller. Understanding that risk — and negotiating accordingly — is the difference between a deal that works and a deal that leaves money on the table you were promised but never received.