Earnouts are one of the most common, and most misunderstood structures in M&A. They’re typically positioned to “align interests” between buyer and seller. In reality, they often do something very different: they shift execution risk back to the seller after the seller no longer controls the business.
If you’re heading into a transaction, you need to understand exactly what you’re agreeing to, because an earnout is not upside. It’s deferred purchase price.
Callout: An earnout is not extra value…it’s value you haven’t been paid yet.
At its core, an earnout is straightforward. A portion of the purchase price is held back and paid later if the business achieves certain performance targets…. usually tied to revenue or EBITDA. On paper, that sounds reasonable.
But once the deal closes, control shifts. The buyer now controls strategy, spending, staffing, and priorities. Yet your payout is still tied to performance. That’s where the disconnect begins. You’re accountable for outcomes you may no longer have the ability to influence.
So, the question becomes: do you want an earnout? The honest answer is no, unless it’s structured on your terms or it’s necessary to bridge a valuation gap and get the deal done. Earnouts can work, but only under the right conditions.
You need to remain actively involved in the business, with real influence over the key drivers i.e. pricing, customer relationships, and cost structure. The performance targets need to be grounded in reality, not projections. And the buyer needs to operate the business in a way that is consistent with how it was run pre-sale. If those elements aren’t in place, you’re taking on risk without control… and that’s a bad trade.
Callout: If you don’t control the drivers, you shouldn’t take the risk.
Where earnouts tend to break down is predictable. First, control leaves but accountability remains. The buyer makes decisions on pricing, headcount, and capex that directly impact performance, but you still own the outcome tied to your earnout.
Second, EBITDA becomes a moving target. If it’s not tightly defined, buyers can allocate corporate overhead, shift expenses, or change accounting policies in ways that reduce reported earnings.
Third, the business plan changes. What you underwrote during diligence often doesn’t survive integration. Priorities shift, resources get reallocated, and your earnout becomes tied to a plan that no longer exists. Finally, time works against you. The longer the earnout period, the more variables come into play. Most earnouts should be no longer than 12 to 24 months…. anything beyond that introduces unnecessary risk.
That said, not all earnouts fail. The ones that work share a common characteristic: alignment between control and outcome. In one transaction involving a mid-sized packaging manufacturer, the structure included 85% of the purchase price paid at closing and a 15% earnout over 18 months tied to EBITDA from the existing customer base.
The seller remained actively involved in managing key customer relationships and pricing decisions. EBITDA was tightly defined, with no ability for the buyer to allocate corporate overhead or introduce accounting changes. The earnout excluded integration costs and new initiatives introduced by the buyer.
Targets were based on the existing run-rate performance, not aggressive growth assumptions. The result: the seller achieved the earnout in full. Not because everything went perfectly but because the seller controlled the key drivers and the rules were clearly defined from the outset.
Callout: Earnouts work when control, clarity, and incentives are aligned.
If you’re going to accept an earnout, you need to approach it with the same discipline you would apply to any investment decision. Control the drivers of performance. Eliminate ambiguity in how results are measured.
Limit the buyer’s discretion where it can impact your payout. Keep the time horizon tight. And wherever possible, negotiate for certainty through minimum payout thresholds, protections against cost allocations, or acceleration provisions. Hope is not a strategy in an earnout.
At the end of the day, earnouts are a tool. They can be effective when used properly, but they are often misused in ways that disadvantage the seller. As a business owner, your leverage is highest at closing. That’s when terms are set and risks are allocated. After that, your influence declines quickly.
Callout: Structure the deal as if you won’t get a second chance—because you won’t.
Treat an earnout for what it is: purchase price that hasn’t been paid yet, subject to conditions you may not fully control. Structure it accordingly or push to get paid at closing.
About the Author
Tim Fischer is an entrepreneur and experienced CFO who helps small business owners navigate complex and ambiguous business challenges. He works alongside leadership teams to identify opportunities, solve problems, and create clear, profitable paths forward for sustainable growth and long-term success.
About the Florida CFO Group
The Florida CFO Group partners with founder-led small and mid-sized businesses to bring financial clarity, credibility, and strategic perspective. As fractional CFOs, we help owners prepare for growth, capital events, and exits long before they are forced to.
Contact Us
If you would like to discuss whether an audit or review makes sense for your business—or how to prepare well before it matters, contact the Florida CFO Group at 1‑877‑352‑2367 or visit https://floridacfogroup.com/contact-us/