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 St. Augustine 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

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 among the most litigated issues in M&A. 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

Studies of earnout deals consistently show that sellers collect their full earnout less than half the time. Buyers have both the incentive and the ability, through accounting decisions and operational choices, to make the numbers not hit.

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

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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• Should I Use a Business Broker to Sell My Business in St. Augustine?
• Should I Use a Business Broker to Sell My St. Augustine Business?
• How to Increase the Value of Your Business Before You Sell

• Category: Selling a Business