To earn or not earn out
Should you stay post-sale?
Entrepreneurs looking to sell their companies almost always have the same questions.
What is the business worth?
Who would buy it?
How do we create competitive tension in the sale process?
As advisors to business owners selling their companies, we hear those questions all the time.
Two questions we ask those business owners, are: (1) why are you selling and (2) are you willing to stay on after the sale?
This is followed by the more specific question: would you agree to an earn-out?
If you own a business and are thinking about an exit, this is a question worth serious reflection. An earn-out can materially increase your compensation in a sale but it is not without risk or downside. How would you really feel about staying on post-sale? What is your exit plan?
What exactly is an earn-out?
An earn-out is a deal structure where a portion of the purchase price is paid only if the business achieves specific performance targets after the sale. Targets are typically tied to revenue or EBITDA, and the earn-out period usually spans one to three years.
In short, this is a mechanism to potentially receive more for your business than would be paid with one up-front payment on completion.
For example, we worked with the founder of a therapy services company who wanted to sell. When we went to market, we received five offers. While two were low-ball attempts and were quickly dismissed, the remaining three followed a classic earn-out structure: each included an upfront cash payment based on a multiple of trailing EBITDA, plus an earn-out consisting of additional cash and share payments tied to performance above agreed thresholds.
Across those offers, the earn-out represented an expected additional 20 to 30 percent on top of the upfront payment. One offer, for example, paid the seller 50 percent of EBITDA above a minimum threshold, calculated and paid every six months over a two-year period!
This is why one might choose to stay on after a sale. An earn-out can materially change the economics of a deal. In some cases, it is the difference between an acceptable outcome and a great one.
Now, an earn-out does not strictly require a seller to continue to work in the business post-completion. In many cases, however, to create the most growth and value, it makes sense for the original founder to continue to lead the business for a time.
Why do buyers ask for earn-outs?
To understand these structures, it helps to ask why buyers want them in the first place. From the buyer’s perspective, an earn-out is all about risk.
When someone acquires your business, they are buying future cash flow. If the company depends heavily on you — your relationships, judgments, or operational knowledge — that future is even more uncertain.
An earn-out keeps you engaged and financially aligned during the transition to new ownership and management. It gives the buyer time to integrate operations, attract and retain new leadership and key employees, and transfer personal knowledge from the seller.
Even when the buyer does not need you operationally, an earn-out can protect a buyer against overpaying. Sale negotiations often involve optimistic growth assumptions. While buyers may be willing to pay for that growth, they want some assurances it’s really coming. Because they don’t pay when growth targets are not hit, earnouts protect buyers from growth that doesn’t materialize.
In short, the earn-out shifts part of the performance risk back to you.
Can you tolerate sticking around?
For some entrepreneurs, staying on after a sale is a perfectly acceptable and desirable career move. We know two individuals, for example, who sold their design agency to Shopify in the early 2010s. They went on to become Shopify’s Director of M&A and Director of UX, respectively.
Leaders selling their business may have multiple opportunities within the acquiror. Earn-outs may be paid in shares of the acquiring company, creating another wealth building opportunity for a selling entrepreneur. Famously, when Apple acquired NeXT, Steve Jobs returned to Apple; the once-ousted founder ultimately reemerged as the company’s visionary CEO and one of the richest people in the world. If you can genuinely embrace the new organization and its mission post-completion, an earn-out can be a strong option.
For other business owners, staying on is simply not appealing or possible. If you are burned out, retiring or need to move on, or if you are simply ready for the next chapter in your life, an earnout probably not right for you.
You’ve also got to ask yourself if you are ready to accept the loss of control and decision making that comes with this structure. For instance, we know a man who sold his rapidly growing healthcare practice in the Northeast U.S.: although he stayed for several years, the whole experience was incredibly painful for him (and his family regularly heard of it) because he was not suited to a more subordinate role. Not everyone who becomes accustomed to being the boss can comfortably return to being an employee.
In another unique case, we worked with one business owner who sold his business to his co-owner, his ex-wife, as part of the divorce. He could hardly agree to an earn-out nor did the buyer of his share want one.
Clearly, some relationships breakdown in such an extreme way that earn-outs are not possible.
Do you financially need an earn-out to do the deal?
Sometimes you may not want to accept an earn-out but financially you may need to.
Let’s say you feel completely finished with your company. However, a prospective buyer agrees to pay an additional 30% if you stay and grow the business for another 18 months. That difference could represent enough to eliminate debt, meaningfully increase retirement security, or materially change your family’s future.
If there are no alternative offers and you have a firm valuation floor you cannot afford to dip below, staying on may substantially improve your long-term financial position.
What else could you be doing with your time, energy, and capital?
Imagine you are presented with an earn-out where the period is 18 months and the maximum additional payout is $1 million. On face value, this might sound like a good deal to you. But the answer would depend on your options.
For example, what if there was another vehicle where that same 18 months of focused effort could generate a greater return? Perhaps you have access to another venture, investment, or partnership that could reasonably produce $2 or $3 million over a similar timeframe. In that case, walking away sooner and redeploying your efforts may be the better economic decision.
Entrepreneurs often succeed not because they persist endlessly but because they reallocate quickly. Alex Hormozi has spoken about this at length. Before Gym Launch became a breakout success, he exited and shut down ventures that were not gaining traction so he could concentrate on the higher-potential opportunity. He did not stick around in cumbersome earnouts.
The question, then, is not simply whether you can earn the additional payout, it is whether it is the highest and best use of your next one to three years.
Final considerations
An earn-out can be a powerful wealth accelerator, or it can be an exhausting detour. The right decision depends on your psychology, your financial position, and your alternative opportunities.
If you are seriously considering an earnout, make sure that, whatever targets you select, you stand a good chance of meeting them. Remember, an earn-out shifts risk back to the seller. If your business does not hit the specific targets set for each specified period, you will not receive any additional payments, despite all the work you do post sale.
Further, you must do thorough due diligence on your acquirer. While most buyers are honourable enough, some actors are wildly unscrupulous, especially the smaller the acquisition. You need confidence that they will honour their commitments and pay what is agreed without looking for ways to avoid it.
Ask yourself:
Who is your potential buyer?
Is there anything in their history that gives you pause?
Have they demonstrated integrity and built a solid reputation?
Or are there signs of questionable dealings, such as past bankruptcies or disputes?
The fine print within an earnout can end up making a huge difference. Sometimes the real question is not whether you would accept an earn-out in principle but whether you should accept this earn-out, with this buyer, under these terms. You may be open to the structure but the timing, the targets, or the character of the counterparty may be wrong.
In the end, an earn-out is not just a financial decision. It is a commitment of time, energy, and trust. Don’t agree to an earn-out if the terms do not make sense.
And give this decision the weight it deserves.
