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Getting to the Point

We post articles that get to the point. Covering topics in law, business, technology, innovation and startups. Each article is based on questions we receive from entrepreneurs, investors and high-growth companies we work with.

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When Earn-Outs Keep the Deal Alive

 

When buyer and seller can’t quite agree on what a business is worth, an “earn-out” can keep the conversation going. An earn-out ties part of the purchase price to the business’s future performance, letting value be proven over time. It turns disagreement into possibility: a way to close the gap without closing the door. But like any bridge, it only holds if both sides trust how it’s built.

Core Insights

  • The metric makes the deal. Earn-outs are dependent on choosing the right metrics for measuring performance. The right metric reflects the real engine of value: revenue for growth, EBITDA for efficiency. The cleaner the measure, the easier it is for both sides to trust the result.

  • Complexity is the enemy of payout. If your earn-out formula needs a spreadsheet to explain, it can be easy to dispute. Great deals use one metric, one timeline, and a simple formula for calculation. Simplicity doesn’t just avoid conflict, it forces clarity about what “success” means.

  • Covenants control outcomes. Once the ink is dry, whoever controls the business controls the metric. A buyer’s operational discretion can make or break the earn-out. Smart sellers ensure their measurement for success remains in their control post-closing.

  • Shorter windows. A 12 - 24 month window forces focus. Beyond that, markets shift, integrations change, and memory fades. Keep it short, measurable, and close to the transaction logic. 

Takeaway

Well-crafted earn-outs can bridge valuation gaps and move a deal forward, but they must be structured carefully to allocate risk appropriately and minimize opportunities for post-closing conflict.

Ink LLP is a business law firm with focused expertise in venture capital, mergers & acquisitions, and complex commercial transactions.

This information is provided for informational purposes only, is highly generalized, and is not legal advice.

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M&AGeoff Dittrich