M&A
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How to structure an earn-out agreement so it actually pays
A buyer offers part of the price later, tied to results. Here is what to set before you sign: the metric, the length, the buyer's duties, and how disputes get settled.
By Surfside Capital AdvisorsPublished Updated 5 min read
An earn-out agreement pays part of the price after closing if the business hits agreed targets. It can close a gap on value, and it pays out when the metric, the period, the accounting rules, and the buyer's duties are written down before you sign.
A buyer offers a number you like, and part of it is payable only if the business hits targets over the next few years. That part is not yet yours, and what the contract says will decide whether it ever is.
What is an earn-out, and why do buyers ask for one?
An earn-out is part of the purchase price that is paid after closing, if the business meets targets set in the agreement. Buyers propose one to share the risk of a forecast. Sellers sometimes accept one to close a gap when they believe the business is worth more than the buyer will pay today. A&O Shearman, writing on the Harvard Law School Forum on Corporate Governance, warns that an earn-out "often converts today's disagreement over price into tomorrow's litigation over the outcome."
The numbers say to read the terms with care. In SRS Acquiom's data, earn-outs appeared in 24% of 2025 deals outside life sciences, and in about 30% of deals with upfront values of $50 million or less, where the median potential was 57% of the closing payment. Among earn-outs in deals closed from 2021 to mid-2024, some amount was paid in 59%, but sellers had received about 21% of the maximum earn-out dollars to date. In lower middle-market deals where the seller earned anything, the median payment was 43 cents on each earn-out dollar.
Which metric should it pay on?
Pick the metric you can influence, and define it to the line item:
| Metric | Who tends to prefer it | How it can go wrong |
|---|---|---|
| Revenue | Sellers, because costs and accounting affect it less | The buyer can cut prices or change the product mix, so revenue holds while profit falls, and you are paid on revenue the buyer shaped |
| EBITDA | Buyers, because it reflects profit | Costs the buyer allocates to your unit, integration expenses, or a change in accounting can lower it |
| Customer retention or a milestone | Either side, when the result is easy to measure | It depends on decisions the buyer makes about customers, staff, and the product |
A&O Shearman notes that revenue is the most popular metric, that buyers prefer net income or EBITDA, and that EBITDA often emerges as a compromise. If you will not hold an operating role after closing, be especially careful with a performance-based earn-out.
How long should an earn-out run?
Shorter is easier to protect. In SRS Acquiom's 2025 data on earn-outs outside life sciences, the median length was 21 months, 38% ran more than one year and up to two, and 19% ran longer than three. The longer the period, the more can change: the buyer's strategy, its leadership, its ownership, and your own energy.
What belongs in an earn-out agreement to protect you?
The contract sets what the buyer may do to the business while the earn-out runs. These are the protections to ask for, with how often each appeared in 2025 deals with earn-outs outside life sciences (SRS Acquiom):
| Protection | What it does | In 2025 deals |
|---|---|---|
| The buyer will not act mainly to harm the earn-out | Bars moves taken to avoid paying | 82% |
| A commercially reasonable efforts standard | Sets how hard the buyer must try | 16% |
| Run the business as the seller did | Keeps strategy and spending steady | 6% |
| Run the business to produce the largest earn-out | Puts your earn-out ahead of the buyer's other goals | 3% |
| Reporting of results | Lets you check the numbers | 93% |
| Acceleration on a change of control | Pays the earn-out if the buyer sells the business | 24% |
Two more points deserve a line each. The accounting principles used to measure the metric should be the ones you used, and any change should need your consent. And watch for offsets: the buyer could set off indemnification claims against your earn-out payments, which the agreement allowed expressly in 65% of these deals and was silent about in the other 35%.
How are disputes settled?
Decide before you sign. The usual route is an independent accountant who settles specific numerical disagreements, with arbitration or a court for the rest. A&O Shearman advises defining clearly whether a third party acts as an expert or as an arbitrator, and limiting an expert to specific factual disputes within their expertise. Without one, a disagreement over a number can only be settled in court.
What mistakes cost sellers money?
- Choosing a metric the buyer controls, such as revenue after the buyer changes pricing.
- Accepting loose standards, such as "reasonable efforts," with no statement of what the buyer must do.
- Setting targets from your own forecast without allowing for how the business changes under new ownership.
- Having no right to see the calculation.
- Agreeing to an earn-out because it makes the headline price look better. Price it at what you expect to receive, and ask what the buyer would pay with no earn-out.
What to do next
- Model your proceeds if the earn-out pays in full, pays half, and pays nothing.
- Decide which metric you can influence, and whether the role you will hold lets you influence it.
- Get the terms written out: the metric definition, the accounting principles, the buyer's covenants, reporting, acceleration, offsets, and the dispute process.
- Compare the offer with the alternatives in how to evaluate a business acquisition offer.
If you want help modeling the scenarios, our M&A advisory work covers valuation, deal structure, and scenario analysis: we value the business, model the structure and the full, half and zero payout cases, and prepare your numbers for the negotiation. We advise and prepare; we do not negotiate or sign for you.
Questions owners ask
Which buyers ask for earn-outs?
Both kinds do. In SRS Acquiom's data on deals outside life sciences, private equity buyers used earn-outs in 24% of 2025 deals, up from 13% in 2014 to 2022, and U.S. public buyers used them in 18%. Strategic vs financial buyers shows how the two differ on structure.
Is earn-out income taxed differently?
It can be. How an earn-out is taxed depends on how it is written and on whether it is tied to your continued work for the buyer, so check the wording on tax treatment before you sign.
General information, not legal, tax, or investment advice.
Sources
- 2026 M&A Deal Terms Study (earnouts outside life sciences, 2025 deals: length, covenants, reporting, acceleration, offsets), SRS Acquiom,
- M&A Earnout and Milestone Trends (2026), SRS Acquiom,
- 2026 M&A Deal Terms Study Special Report: Lower Middle-Market Deals (earn-out potential and achievement), SRS Acquiom,
- The Art and Science of Earn-Outs in M&A, A&O Shearman, on the Harvard Law School Forum on Corporate Governance,
Figures and rules as published by these sources on the dates shown.
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