READY FOR JASON: Ask Page — How do earn-outs work in a business sale?

FINAL DRAFT

Short answer: An earn-out is a portion of the acquisition price that is paid after close, contingent on the business hitting specific performance targets. In theory, it bridges a valuation gap. In practice, most founders collect a fraction of what they were promised.

SRS Acquiom's analysis of over 2,200 private-target M&A deals found that sellers collect roughly 21 cents for every dollar of earn-out value they were promised. That number should be in your mind before you accept any earn-out component.

The structure matters more than the headline. Earn-outs tied to metrics that the buyer controls post-close (EBITDA, revenue) are fundamentally different from earn-outs tied to milestones you can hit independently (product launches, customer contracts you bring in yourself). The first type puts your payout in someone else's hands. The second gives you a genuine path to collection.

The warning signs of a bad earn-out structure: targets set near your current performance with no upside, earn-out period longer than 24 months, no operational covenants requiring the buyer to maintain investment levels, no accounting transparency provisions, EBITDA-based with no reinvestment obligation.

If the earn-out is significant (more than 15% of total deal value), it is worth getting an M&A attorney who handles seller-side earn-out negotiations specifically. The default language in most definitive agreements protects the buyer. Every protection for the seller requires negotiation.

Related: What is the best structure for a founder exit? | How do I negotiate a software company acquisition?

-- Drafted by Bolt 17 Aug 2026 | Part of W1 Ask Page Batch 3