Acquirers keep pitching offers with large earnouts or significant rollover equity. How do we evaluate these deal structures, and how do we avoid getting trapped by unrealistic post-close targets?

Question

Tyler Smith · Accepted Answer

Acquirers use earnouts and rollover equity to shift financial risk from their balance sheet to yours. An earnout promises future payments if the business hits specified targets, while rollover equity requires you to reinvest a percentage of your proceeds into the buyer's new capital structure. While both offer potential upside, they frequently become sources of severe conflict.

Earnouts are notoriously difficult to collect. Once the buyer owns the company, they control capital expenditures, hiring decisions, administrative overhead allocations, and sales compensation models. A buyer can easily suppress bottom-line profit by shifting corporate expenses onto your operating entity, causing you to miss your earnout thresholds through no fault of your own.

If an earnout cannot be avoided, negotiate benchmarks tied strictly to top-line gross revenue or gross margin rather than net EBITDA. Secure operational covenants that grant you clear authority over daily execution during the earnout period.

For rollover equity, evaluate the buyer as if you were an outside investor. Examine their track record of successful liquidity events, the debt leverage they place on the holding company, and their governance rights. If they load the business with aggressive senior debt, your junior equity can be completely wiped out in a market downturn.

Structure your business on your runway so that its independent operational strength commands maximum cash at close. Never rely on an earnout to reach your minimum acceptable walkaway number.