Earnouts: Deferred Purchase Price or Deferred Argument?

How can a Founder bridge a valuation gap with a buyer when selling their business? One solution is to structure a portion of the purchase price as an earnout. Earnouts function as the “prove-it” component of M&A purchase price and are often used to bridge disagreements on purchase price. We regularly see them in mid-market M&A transactions on both the buy-side and sell-side, and they can benefit both parties. However, cash will always be king, so higher cash purchase price at closing always trumps conditional earnouts, no matter how achievable.

Consider whether an earnout will actually provide the additional money you are anticipating, or whether it is more likely to cause problems for you after the sale of your startup.

In other words, are earnouts actually a deferred purchase price or a deferred argument with the buyer? When does an earnout bridge a true valuation gap, and when is it just a buyer appeasing a founder, or even a fight scheduled for two years from now? Factors to consider include metric selection, buyer operating covenants, and the drafting choices that decide whether the seller ever sees the money. Our startup attorneys can explain in more detail.

Understanding How an Earnout Works

An earnout is a portion of purchase price that is contingent on the business, or the sellers meeting a particular target or set of targets based on an agreed-upon metric. It is designed to bridge a valuation gap — when the seller believes the startup is worth more than what the buyer initially wants to pay. The earnout, then — if the agreed metrics are achieved — pays the seller post-closing.

With an earnout, the seller still has the ability to earn what they believe the business is worth, while the buyer’s up front risk is reduced. When a seller and buyer agree to an earnout, that agreement is outlined through an earnout provision of the definitive purchase agreement.

Will the Seller Actually Get the Money?

Whether the seller will actually get an earnout payment depends on several factors. First, what metric is being used? In general, there are performance-based earnouts, profit-based earnouts, and milestone-based earnouts. Milestones can also be tied to ongoing support from a founder team.

Sellers can also negotiate for operating covenants that help (or at least prevent the buyer from obstructing) their ability to meet the earnout target, such as a minimum budget and control over production. The structure also matters; for instance, a tiered payout (meaning if you miss the target by a small percentage but come close) lets you still receive a partial earnout.

Make Sure Your Earnout Actually Pays Out

Earnout provisions are commonly used tools in M&A agreements, and they are particularly prevalent when the seller believes the startup has a higher value than what the buyer is currently willing to pay. Whether you want to find out more about negotiating an earnout provision or you want to learn more about whether or not it is likely worth it to you to seek an earnout provision, one of the M&A attorneys at Triumph Law can assist you. Our firm provides a wide range of mid-market M&A services, and we can assist you as you think through the sale of your startup. Contact our firm today to find out more about how we can help your business.

Source:

corpgov.law.harvard.edu/2025/07/11/the-art-and-science-of-earn-outs-in-ma/