What Is an Earnout When Selling a Business?
An earnout is the part of your sale price you don't get at closing — a contractual promise that the buyer will pay you more later, but only if the business hits agreed targets after you've handed over the keys. Buyers love earnouts because they bridge a price disagreement with your money instead of theirs. Sellers should treat them with respect and suspicion in equal measure: they appear in about 24% of private deals, and only about one earnout dollar in five ever gets paid.
How an earnout works
Mechanically it's simple. The purchase agreement sets a closing payment — cash, maybe a seller note — plus an earnout: extra payments tied to performance over a defined window, usually one to two years. Hit the targets, you get paid. Miss them, you don't. The arguments are all in the details: what metric, measured how, by whom, with what access to the books, and what happens if the buyer changes the business midstream.
The metric matters more than the amount. Revenue targets are hard to manipulate — a sale is a sale. Profit targets are an invitation to creative accounting: the buyer adds a management fee here, an allocated overhead there, and your target recedes like a mirage. If you must accept an earnout, push for revenue or gross profit, defined in writing, with audit rights.
Source: SRS Acquiom 2026 M&A Deal Terms Study, via Fasken.
Why buyers propose them — and what that tells you
An earnout is how a buyer says "I don't believe your projections" politely. Sometimes that's fair: if 40% of your revenue is one customer, or last year's spike came from a contract that may not renew, the buyer is pricing real risk. Sometimes it's just negotiation — a way to advertise a big headline number while committing to a smaller one.
Here's the part sellers consistently underweight: once you close, you don't run the business anymore. The buyer decides the marketing budget, keeps or loses your best salesperson, raises prices or botches the transition. Your earnout rides on their choices. Courts see a steady stream of earnout lawsuits for exactly this reason, and even winning one costs years and legal fees. The cleaner your deal's cash-at-close, the less you'll ever need to know about earnout litigation.
Worked example (hypothetical)
You're selling a distribution business and get two offers. Offer A: $1.8M, all at closing. Offer B: $1.6M at closing plus a $400K earnout if revenue stays above $3M in each of the next two years — a $2M headline.
Price the earnout like the data says, not like the headline reads. At the observed ~20% payout rate, Offer B's expected value = $1,600,000 + (0.20 × $400,000) = $1,680,000 — $120,000 less than Offer A, despite advertising $200,000 more. Even at a generous 50% payout odds, B is worth $1.8M — merely a tie, with two years of waiting and arguing bundled in free.
When an earnout genuinely makes sense
They're not always a trap. An earnout is reasonable when the near-term upside is real but unprovable: a signed contract that starts next quarter, a new location opening, a pending regulatory approval. It can also break a genuine valuation deadlock when both sides are negotiating in good faith — you believe the hockey stick, the buyer doesn't, and the earnout lets the business settle the argument. If you're staying on to run the company post-sale, an earnout even aligns incentives, since the person driving the results is you.
And one hard structural rule for Main Street deals: SBA-financed buyers can't use earnouts at all — SBA rules require a fixed price at closing. Since roughly 78% of small-business buyers expect SBA financing, most sub-$1M sellers will never face a real earnout; they'll see seller notes instead, which are a different animal — a fixed obligation, not a performance bet.
If an earnout does land on your term sheet, negotiate it like it matters: revenue-based, short window, objective accounting definitions, audit rights, acceleration if the buyer sells or guts the business, and — critically — covenants that the buyer will run the business in a way that gives the earnout a fair shot. Get your deal attorney in before the LOI locks the structure, not after. And have your broker model every offer as expected value, the way the example above does. A broker who compares headline numbers instead of probable dollars is doing arithmetic for the buyer — one of several tells worth watching.
Frequently asked questions
What is a typical earnout when selling a business?
One to two years, with a median potential of about 34% of the closing payment at stake, usually triggered by revenue or gross-profit targets. The shorter the window and the harder the metric, the better for the seller.
Do earnouts actually get paid?
Only about one dollar in five, across studied deals. Treat the closing payment as the price and the earnout as upside — never the other way around.
Can an SBA-financed deal include an earnout?
No. SBA rules prohibit them; the price must be fixed at closing. Most Main Street deals use seller notes instead.
Who's advising you on that earnout?
The broker structuring your deal has a track record with past sellers. Look them up — individual brokers, rated on six deal-specific parameters. Free, and brokers can't pay to polish it.
Browse rated brokers →