04 Mar Earnouts in Business Sales: Smart Deal Structure or Risky Gamble?

Earnouts: What Are They Really Like?

Selling your business should be a clean exit. A buyer pays top dollar, you walk away or stay on for a reasonable period after sale, and you finally get to enjoy the wealth you spent years building.

But what if I told you that deal structure could keep you tied to your business for years—without ever seeing the full payout you were promised?

That’s the dirty secret of earnouts. Buyers love them because they get to pay you less upfront while making you “earn” the rest of your money after you’ve handed over control. Sounds fair, right? Except here’s what really happens:

–Revenue targets get missed—because the buyer changes the way the business is run.

–Expenses mysteriously skyrocket—shrinking profits so they don’t have to pay you.

–The buyer stops caring—shifting focus to other ventures while your business (and your earnout) suffer.

And when it’s time for your payout? You get excuses. Or worse—you get nothing at all.

Are you about to walk into a deal that could rob you of your hard-earned payday? Before you sign anything, here’s what you need to know about how buyers use earnouts to shortchange sellers—and how to make sure you actually get paid.

The Earnout Illusion

One of the biggest traps sellers fall into is the earnout—a deal structure where part of your sale price is tied to the business hitting performance targets after you’ve sold it. It sounds great in theory: The buyer pays you a chunk up front, and you get the rest as the business continues to succeed. But in reality, earnouts can be a high-risk gamble where you lose control and never see the money.

Buyers love earnouts. Why? Because they shift the risk to you. Instead of paying you full price at closing, they only pay part, then promise the rest if certain financial targets are met over the next few years.

The Problem? Once the buyer takes over, they’re in the driver’s seat. They control the expenses. They control the decisions. They control the revenue. And if they mismanage the company, slash costs, or shift focus? Guess what—you don’t get paid.

When Earnouts Go Bad

Here’s what happens in real deals:

–Revenue Targets Get Missed – The buyer runs things differently, and suddenly the company isn’t hitting the numbers needed for your earnout.

–Expenses Mysteriously Rise – Maybe the buyer “reinvests” heavily or loads the company with unnecessary costs, conveniently lowering profits (and your payout).

–The Buyer Loses Interest – They acquire multiple businesses, and yours gets put on the back burner, making it impossible for you to hit the earnout milestones.

And let’s not forget the lawsuits. Many sellers end up in court fighting for their earnout payments because the new owners deliberately manipulated the numbers to avoid paying.

When an Earnout Might Make Sense

To be fair, not all earnouts are bad—if structured correctly. A few key safeguards:

✔ Shorter Timeframe – A reasonable earn-out period can vary from deal to deal and depends on the circumstances, companies involved and other factors.  It’s important to know what’s market for your type of deal so you don’t get tied in for longer than is typical.

✔ Clear, Unmanipulable Metrics – Tie the payout to revenue, not profit, so the buyer can’t play accounting games.

✔ Contractual Protections – Ensure the buyer is legally required to run the business in a way that doesn’t sabotage the earnout.

✔ Cap Your Risk – Get as much money at closing as possible. Assume that any earnout is money you may never see.

The Bottom Line

Earnouts are buyer-friendly, seller-risky.  If a buyer insists on an earnout, it’s often a red flag that they don’t have the confidence (or cash) to pay you what your business is worth.

Before you sign away your future earnings, get the truth about selling your business the right way.  Your exit should be on your terms, not theirs.