Negotiating Your Earnout: What Every Business Owner Should Know

By Phil Harwood | March 2025

If you’re thinking about selling your business, you may have heard of something called an “earnout.” But what you may not realize is that earnouts deserve special attention because of their structure and potential risks. Let’s take a deeper look.

What Is an Earnout?

An earnout allows a seller to receive a portion of the sale price based on future performance. For example, if a seller wants $10 million and the buyer only wants to pay $8 million, an earnout might bridge that gap — with the possibility of earning up to $12 million, based on performance targets.

“The buyer has doubts; the seller has hopes.” – Mark Gunderson

While earnouts can lead to a higher valuation, they come with trade-offs. A seller may no longer have control over operations, making it harder to meet earnout conditions. For buyers, earnouts reduce upfront cash needs and provide potential offsets for indemnification claims.

Key Components to Negotiate

1. Earnout Amount

Typically, earnouts represent 10–25% of the total sale price. Sellers prefer a lower percentage to minimize risk, while buyers prefer higher percentages to lower upfront investment.

2. Duration

Earnout periods usually range from 1 to 5 years. Sellers prefer shorter periods for control and payout certainty; buyers often prefer longer terms to manage performance risk.

3. Performance Criteria

Sellers often want earnouts tied to revenue, while buyers prefer net profit. Common compromises include EBITDA or EBIT. Non-financial metrics like product launches or client retention may also apply.

Accounting Considerations

Accounting Integration

Merging accounting systems can affect how performance is tracked. Sellers often favor audits or third-party verification to ensure accurate calculations.

Transaction & Extraordinary Expenses

These include legal, consulting, or one-time events that may skew financial performance. Buyers may want to include them in calculations; sellers typically push for exclusion.

Depreciation & Overhead Allocation

How depreciation is handled can significantly affect EBITDA. Similarly, how overhead is allocated can tilt results in favor of one party over the other.

Business Integration

Buyers want quick integration; sellers may prefer to delay changes to maintain earnout predictability. Balancing both interests is essential for success.

Legal Protection and Best Practices

Clearly outline disclaimers, representations, and remedies in the agreement. Use third-party services for earnout calculation and consider an escrow arrangement to hold funds pending performance.

Ultimately, every element of an earnout is negotiable — and it’s often the most overlooked aspect of a deal. Taking the time to get it right helps ensure a smoother transition and reduces the risk of post-sale conflict.