What Is an Earnout and Should I Accept One When Selling My Business?

When buyers and sellers can’t agree on a single price for a business, an earnout is often proposed as a solution. It sounds reasonable on the surface, you get paid based on how the business performs after the sale. But earnouts come with real risks that sellers in Florida need to understand before agreeing to one.

What Is an Earnout?

An earnout is a provision in a business purchase agreement where a portion of the sale price is contingent on the business achieving certain performance targets after closing. Rather than paying the full agreed price at closing, the buyer pays a base amount upfront, and additional payments to the seller over time if the business hits agreed-upon milestones.

Example: You and a buyer agree your business is worth $1.5M, but the buyer is only willing to commit $1.1M at closing. They propose an earnout: if the business generates $600K or more in revenue in each of the next two years, they’ll pay you an additional $200K per year. You get up to $1.5M total, but only if the business performs.

When Are Earnouts Used?

Earnouts typically appear when:

• The buyer and seller disagree on the business’s value or growth trajectory
• The business has been growing rapidly and the seller wants credit for future earnings
• There’s uncertainty about whether key customers or contracts will survive the transition
• The buyer’s financing is limited and they can’t fund the full purchase price at closing

From the buyer’s side, an earnout is a way to shift risk. The buyer is saying, in effect, “I’m not sure the business will keep performing the way you say it has, so I’ll pay for results after I see them.” It also lowers the cash the buyer has to bring to closing. (Some contracts spell it earn-out; it means the same thing.)

Earnouts also show up when past results are a weak guide to the future: a newer business with a short track record, or revenue that swings with the seasons or with a few large projects.

The Risks of Earnouts for Sellers

Earnouts benefit buyers far more than sellers. Here’s why sellers should approach them with caution:

You No Longer Control the Outcome

Once you sell the business, the buyer controls operations. They make decisions about pricing, staffing, marketing, and expenses. If those decisions, intentionally or not, cause revenue or profit to fall short of earnout targets, you don’t get paid. And you have little recourse.

Disputes Are Common

Earnout disagreements are a common source of post-closing disputes. Sellers and buyers often disagree about how performance is measured, how expenses are allocated, and whether targets were fairly achievable. Even clearly written earnout agreements end up in arbitration.

The Money May Never Come

Many earnouts pay less than sellers expected. Buyers have both the incentive and the ability, through accounting decisions and operational choices, to make the numbers not hit.

Earnouts Are Off the Table in SBA-Financed Deals

Many buyers of Florida main street businesses finance the purchase with an SBA 7(a) loan. Under the SBA’s current lending rules (SOP 50 10 8.1, effective October 1, 2026), seller earnouts are prohibited in 7(a) loans used to buy a business. If your buyer is using SBA financing, an earnout proposal means the structure has to change before the lender will approve it.

Related SBA rules shape how the gap gets bridged instead:

• The lender orders its own independent business valuation, and if the price is higher than that valuation, the buyer has to cover the difference with equity.
• The rules allow the reverse of an earnout, a buyer rebate based on business performance, and any rebate the seller pays goes toward paying down the SBA loan.
• A seller note that is subordinated to the lender and on full standby (no principal or interest payments for the term of the SBA loan) can count toward part of the buyer’s required equity.
• In most acquisitions financed this way, the seller can’t stay on as an owner, officer, or employee. The business can hire the seller as a consultant for up to 24 months.

That last rule matters in any deal: if you won’t be inside the business, you have little influence over the results that decide your payment. See how SBA loans affect the sale of your business.

When an Earnout Might Make Sense

Despite the risks, there are situations where earnouts are reasonable:

• The earnout period is short (12 months or less)
• The targets are based on gross revenue rather than profit (harder to manipulate)
• The seller is staying involved in operations and maintains some influence over results
• The base payment at closing already covers your minimum acceptable price
• The earnout is a relatively small portion of the total deal value

How to Protect Yourself If You Accept an Earnout

• Use revenue, not profit, as the metric: Revenue is harder to manipulate than EBITDA or net income
• Keep the period short: One year is better than three
• Define every term explicitly: What counts as revenue? What expenses are included? Who prepares the financials?
• Get audit rights: The right to independently verify the numbers
• Include a change-of-control provision: If the buyer sells the business, the earnout accelerates and becomes due immediately
• Work with an experienced M&A attorney: Earnout language is highly technical and the details matter enormously

Limit How the Buyer Can Move the Numbers

Ask for operating covenants, which are the buyer’s promises about how the business will be run during the earnout period:

• Run the business in the ordinary course, with the same accounting methods used to set the targets
• Charge no new management fees, corporate overhead, or shared costs against the earnout metric
• Move no customers, contracts, or revenue to another company the buyer owns, and sell no key assets without your consent

Avoid All-or-Nothing Targets

A single hard target means missing it by a dollar can cost you the whole payment. Ask for a sliding scale that pays part of the earnout for partial performance, and a catch-up provision that lets a strong second year make up for a short first year.

Decide Now How Disputes Get Resolved

Spell out in the purchase agreement when the buyer must deliver each earnout calculation, how long you have to object, and who decides if you disagree. Many agreements name an independent accountant to settle calculation disputes, which is usually faster and cheaper than a lawsuit.

Watch Set-Off Rights and Secure the Payment

Buyers often ask for the right to subtract indemnification claims from earnout payments. If you agree, limit it to claims that have been finally resolved. Then ask how the payment is secured, such as an escrow or a guarantee from the buyer’s owners. An earnout is only as good as the buyer’s ability to pay it.

Know How the Payments Will Be Taxed

When the total price can’t be determined by the end of the year of sale, the IRS treats it as a contingent payment sale, and its own example is a business sold for a share of future profits. Special installment sale rules then apply, and part of each later payment may be treated as interest. Have your CPA model the earnout before you sign.

Value the Earnout Before You Compare Offers

Don’t count an earnout at face value. Discount it for the chance it never gets paid and for the years you’ll wait. A lower headline price with more cash at closing can be worth more than a bigger number that depends on a buyer you can’t control.

Frequently Asked Questions

What is the difference between an earnout and a seller note?

A seller note is a loan you make to the buyer for part of a fixed, agreed price, and the buyer owes it whether or not the business performs. An earnout is extra money that is paid only if the business hits targets after closing. Both depend on the buyer’s ability to pay, but only the earnout also depends on results you no longer control.

What is the difference between an earnout and an escrow holdback?

An escrow holdback is part of the agreed price set aside at closing to cover claims under the purchase agreement, and it is released to you if no valid claims come up. An earnout is additional money that depends on how the business performs after closing. A holdback protects the buyer against problems with what you sold; an earnout protects the buyer against future results falling short. Learn more about escrow holdbacks.

The Better Alternative: Negotiate a Clean Price at Closing

The best outcome for most sellers is a fair price paid in full at closing, no earnout, no uncertainty. A skilled business broker can often bridge the valuation gap through competitive marketing (creating multiple offers) and skilled negotiation, making earnouts unnecessary.

If you’re selling a business in St. Augustine or Northeast Florida and a buyer is proposing an earnout, let’s talk before you sign anything. Understanding the risks is the first step to protecting your payout.

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Related Reading

• How to Find the Right Business Broker in St. Augustine, FL
• How to Increase the Value of Your Business Before You Sell

• Category: Selling a Business