Offers & due diligence
Should I accept an earnout when selling my company?
When an earnout fairly bridges a price gap, when it is a hidden discount, and the terms that decide whether it ever pays.
By Michael D. Rubin, CEO & Founder · September 2026 · 876 words
Accept an earnout only when it bridges a genuine disagreement about future results, the targets are measured in a way you can check, and the cash you receive at closing is enough that you would still be satisfied if the earnout paid nothing. An earnout is part of the purchase price that is paid later, and only if the business hits agreed targets after the sale.
Used well, an earnout lets a buyer pay for growth it cannot yet see. Used badly, it is a discount dressed up as a higher price. The difference is almost entirely in the drafting, so the answer depends less on the word “earnout” than on the terms behind it.
What an earnout is really doing in an offer
An earnout exists because seller and buyer disagree about the future. You believe next year’s growth is real because you can see the pipeline. The buyer will not pay for growth until it shows up in the numbers. The compromise sounds like this: $8 million at closing, plus up to $2 million over two years if gross profit exceeds an agreed level.
From the buyer’s side, an earnout shifts risk back to you. From your side, you are taking on risk in a business you no longer control. After closing, the buyer decides on hiring, pricing, spending and how the company’s books are kept. Every one of those decisions can move the number your payment depends on.
When an earnout can make sense for you
- Your growth is backed by signed contracts, a documented backlog of orders or a clear recurring trend, so the target is realistic rather than hopeful.
- You are staying on to run the business during the earnout period and will have real authority over the things that drive the target.
- The target is measured on revenue or gross profit, which are harder to manipulate than net income after the buyer’s own overhead charges.
- The cash at closing already reflects a fair price for the business as it stands today, and the earnout is genuinely extra.
- The buyer plans to run your company largely as it is, rather than folding it into another operation where its results disappear.
When to push back or walk away
Be wary when the earnout makes up a large share of the headline price, because then the offer is really a much lower price with an option attached. Be equally wary when the target is based on EBITDA (earnings before interest, taxes, depreciation and amortization, a common measure of operating profit) calculated after the buyer adds management fees or corporate charges you cannot see.
Other warning signs: vague definitions, long measurement periods, an all-or-nothing target where missing it by one dollar pays zero, and a buyer who plans to replace you or merge your customers into its own accounts. If the buyer will not put a sample calculation in writing, assume the earnout will be hard to collect.
The terms that decide whether you ever get paid
| Term | What to ask for |
|---|---|
| The metric | Revenue or gross profit, defined in the purchase agreement, using the same accounting methods as your historical statements |
| The period | As short as the buyer will accept; each extra year adds risk you cannot manage |
| Payment shape | A sliding scale that pays partially for partial performance, not a single cliff |
| Operating commitments | The buyer runs the business in the ordinary course and does not divert customers, staff or sales to another entity |
| Acceleration | The full earnout becomes due if the buyer sells the company, merges it away or ends your role without cause |
| Reporting and review | Monthly results sent to you and the right to have an accountant review the calculation |
| Disputes | An independent accountant decides calculation disagreements quickly, instead of a lawsuit |
How to weigh an earnout against other offers
Treat an earnout as worth less than its face value. Ask yourself one question: would I sell for the cash at closing alone? If the answer is no, the earnout is carrying weight it may not be able to bear. Our guide on how to compare offers when selling your business shows how to line up cash, notes, earnouts and adjustments side by side.
Earnout payments can also be taxed differently depending on how they are written and when they arrive. That question belongs to your CPA and transaction attorney, and it should be answered before you sign the letter of intent (LOI), the document that sets the main deal terms before due diligence begins.
How MDR & Associates handles earnouts
The best defense against a heavy earnout is competition. When several qualified buyers submit letters of intent at the same time, buyers who lean on contingent payments have to improve their cash terms or lose the deal. Negotiating multiple letters of intent at once is step six of our ten-step process, and a principal of the firm is in every negotiation.
We present every offer to you in person and walk through what each earnout would actually pay under realistic scenarios, alongside your own transaction attorney, who drafts the language. You accept, reject or counter. If you want to know how buyers are likely to view your growth story before you go to market, talk with us confidentially.
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