Buyers keep proposing structures where a significant portion of our purchase price is tied to a multi-year earn-out. How do we evaluate and prepare for these earn-out structures on our exit runway to ensure we actually get paid?

Question

Tyler Smith · Accepted Answer

Earn outs are a common tool buyers use to bridge a valuation gap, but they are incredibly risky for sellers. If you must agree to an earn out, you must structure your business operations on your exit runway to ensure you actually hit those future targets.

First, keep the targets simple and fully within your control. Try to tie the earn out payments to top line revenue goals rather than net income or EBITDA targets. Buyers can easily manipulate bottom line profitability post sale by allocating corporate overhead, changing accounting practices, or investing heavily in new initiatives.

Second, secure your post sale role on the Accountability Chart. You must negotiate for clear decision making authority over the resources and staff required to hit the earn out milestones. If you are demoted to a non voting advisory role with no control over budget or strategy, achieving your earn out goals becomes nearly impossible.

Finally, track your progress using your weekly Scorecard. Ensure your team is fully aligned around the specific metrics that drive the earn out. If you cannot track these metrics with absolute precision today, do not agree to have your payout depend on them tomorrow.