The part you might not get

Earn outs explained for UK sellers

What an earn out is, why buyers want one, how the target gets defined, the four ways they go wrong, and what to insist on before you sign.

An earn out is the part of the price you only get if the business performs after you have sold it. It is how a buyer bridges the gap between what you think it is worth and what they are willing to risk.

Used well it gets a deal done that would otherwise have failed. Used badly it is how a £12m sale quietly becomes an £8m one.

What a £12m headline actually pays

Illustrative. £8m on completion, £4m over two years against an EBITDA target.

The headline is the top line. The number you should be comparing against other offers is the bottom one, because that is what you get if the two years do not go to plan.

Why buyers want one

Rarely because they are being difficult. Three honest reasons.

They are not sure the performance continues without you. If you hold the relationships, an earn out transfers that risk back to the person best placed to manage it.

You are forecasting growth they cannot see yet. A pipeline is not revenue. An earn out says prove it and we will pay for it.

It keeps you engaged. A seller with money riding on next year behaves differently to one who has already been paid.

How the target gets defined

This is where the negotiation actually matters, and where most sellers spend too little time.

EBITDA is most common and most dangerous, because it is affected by every decision the new owner makes
Revenue or gross profit is harder to manipulate and easier to measure, but buyers resist it because it ignores cost control
Specific milestones, a contract renewed, a site opened, a customer retained. Cleanest of all where the deal allows it

Whatever the measure, it has to be defined in the agreement in enough detail that two accountants would reach the same number. Vague definitions are resolved in the buyer’s favour, because they control the accounts.

The four ways earn outs go wrong

1. The buyer changes the business. They restructure, reallocate central costs, move your team onto other work or push their own overhead through your profit and loss. Your EBITDA target becomes unreachable through decisions you did not take.

2. You lose the authority to deliver it. You are told to hit a number while needing approval to hire, to price, or to spend. The two are not compatible and it causes more disputes than any other cause.

3. The measure was never tightly defined. Adjusted EBITDA, adjusted by whom and for what. If the agreement does not say, you will find out at the worst possible moment.

4. A cliff edge. Hit 100 per cent of target and get everything, hit 95 per cent and get nothing. Sliding scales are fairer and far easier to argue for before signing than afterwards.

Comparing an offer with an earn out against one without? The headline numbers are not comparable. We will tell you what each is actually worth.

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What to insist on

Protections on how the business is run. No reallocation of group costs, no transfer of staff or customers out, a defined level of investment maintained
The authority to hit the number. Set out in writing what you can decide without approval
A sliding scale rather than a cliff, so partial performance pays partially
Information rights. Monthly accounts throughout the period, not a figure at the end
An agreed dispute mechanism. An independent accountant named in the agreement, not litigation
Acceleration on a change of control. If they sell the business on, the earn out falls due
A cap on the downside. Some earn outs can go negative. Know before you sign

The one rule

Judge the deal on the money you get on completion. Treat the earn out as upside that may not arrive.

If the completion payment alone is not an outcome you would accept, the structure is wrong, no matter how attractive the headline. That is the test to apply to every offer, and it is the thing sellers most often fail to do.

Earn outs are also common in management buyouts, usually as vendor loan notes rather than performance targets, which carry a different risk again.

Common questions

Answered.

How long does an earn out usually last?

One to three years, with two being most common. Longer than three is unusual and difficult to manage, because by then the business has changed enough that the original target measures something that no longer exists.

Can I be forced to stay and work during the earn out?

Usually yes, and often you would want to, because it is hard to hit a target you have no influence over. What matters is that your authority matches your responsibility, set out in writing rather than assumed.

What if the buyer deliberately misses the target?

It happens, and it is why protections in the agreement matter more than trust. Restrictions on cost allocation, an information right to monthly accounts, and a named independent expert to resolve disputes are the practical defences.

Should I accept a higher offer with an earn out over a lower one without?

Compare completion payment against completion payment first. If the certain money in the lower offer beats the certain money in the higher one, the higher offer is only better if you believe the earn out will pay, and you will not control whether it does.

Judge it on the certain money

Is the offer as good as it looks?

The headline and the completion payment are different numbers. We will tell you which offer is actually better, and what the earn out is realistically worth.