An earnout sounds straightforward until you’re on the hook for one. The basic idea: instead of getting all your money at closing, the buyer ties a chunk of your sale price to how well the business performs after you sell it. Sounds risky, right? It is—but it’s also incredibly common in small business deals.
Here’s a practical example. You’re selling your consulting business for $1 million. The buyer offers $700,000 at closing and $300,000 in earnouts. The earnout vests over three years if revenue stays above $2 million per year and gross margin stays above 40 percent. If the business hits those targets, you get your full $1 million. If it doesn’t, you get less.
From the buyer’s perspective, this makes sense. They’re buying a business they don’t yet operate, and earnouts de-risk their purchase. They’re betting on the business’s future performance, and if it doesn’t perform the way the seller promised, they recoup some of that risk by paying less.
From your perspective, it’s worrying. Because the buyer now controls whether you get the rest of your money.
The Real Risk
This is the crux of the earnout problem: once you sell the business, the buyer is in control. They make staffing decisions, pricing decisions, operational decisions. If they want to make less money next year, they can. That’s not necessarily malice—it might be strategic—but it affects your earnout.
Worse, disputes about earnouts are common. Did revenue include that one-time contract? How was gross margin calculated? Did they make reasonable effort to hit targets? These arguments can drag on for months after closing, straining your relationship with the buyer and potentially costing you real money.
What’s Typical
Most earnouts fall in the 10 to 30 percent range of the total sale price. A three-year earnout is common; two-year is favorable for the seller (shorter exposure), five-year is favorable for the buyer (longer upside). The targets are usually tied to revenue, EBITDA, or customer retention, sometimes with profitability guardrails.
A well-structured earnout has clear definitions. Don’t accept vague language like “business performs well.” Instead, your agreement should specify exactly how revenue is calculated, what expenses count toward margin, and what constitutes a reasonable business decision. You want precision.
Negotiating Earnout Terms
Your goal: minimize exposure and ambiguity. Here’s how:
Negotiate the amount. The smaller the earnout piece, the better. Try to get 80-85 percent at closing, 15-20 percent in earnouts. Every percentage point at closing is money you don’t have to fight for later.
Keep the measurement period short. Two years is better than three; one year is better than two. The longer you’re exposed, the more time something can go wrong.
Define targets precisely. Use audited financials or third-party accounting. Specify exactly how each metric is calculated. Include a dispute resolution process—maybe you bring in a CPA to settle disagreements rather than going to litigation.
Negotiate reasonable effort. Some earnout agreements include language saying the buyer must use reasonable effort to hit targets. That protects you from the buyer sabotaging results on purpose. Make sure that clause is in your deal.
Consider a collar. A cap means the earnout maxes out at a certain amount (good for buyers, but sometimes acceptable). A floor means you get a minimum if targets are almost hit (good for sellers). Some deals include both.
Get clear on working capital. Sometimes earnout disputes stem from changes in working capital or how the buyer accounts for it. Agree upfront on how working capital will be treated.
The Ugly Truth
Some earnouts work great. The buyer operates the business as promised, hits targets, and pays you on schedule. But others turn into disputes or, worse, the business underperforms and you leave money on the table with no recourse.
This is why the size of the earnout matters. A $50,000 earnout dispute is annoying. A $300,000 one can be life-changing. The bigger the earnout, the harder you should negotiate on structure and clarity.
If a buyer wants a huge earnout—say, 40 percent of the price—that’s a red flag that they don’t actually believe in the business at the price they offered. It might be worth reconsidering whether that’s the right deal. You want a buyer who’s confident in what they’re buying.
An earnout isn’t inherently bad. Many successful deals include them. But go in with open eyes: you’re taking on risk, the buyer controls variables, and clarity in your agreement is everything. Don’t just accept earnout terms because the buyer offered them. Negotiate hard, get specifics in writing, and know exactly what you’re agreeing to.