An earn-out is often how a deal gets done when a buyer and seller disagree on value. The buyer pays part of the price at completion, and the rest only if the business performs after the sale. On paper, the headline price goes up. In practice, the money you are promised depends on a business you no longer own, run by people who may have different priorities. This guide explains how to tell what an earn-out is really worth.
Why buyers propose them
- To bridge a valuation gap. You say the growth is coming. They say prove it. An earn-out lets you be paid if you are right.
- To keep you engaged. If the business depends on you, an earn-out ties you in through the handover.
- To share risk. If profit is volatile, concentrated in a few customers or hard to verify, the buyer protects itself by paying for results, not forecasts.
Notice the pattern: the less a buyer trusts the business without you, the more of the price moves into an earn-out. Preparation is the best way to keep more of the price in cash on the day.
How to value an earn-out
Never add an earn-out to the cash at completion as if it were the same money. Ask three questions of every pound:
- When is it paid? Money in two years is worth less than money today.
- How likely is it to be paid? Be honest about the targets, especially if they depend on things you will not control.
- What could reduce it? Read the definitions of profit, the costs that can be charged to the business, and any set-off for warranty claims.
The valuation calculator compares two offers in today's money. Put a cash-heavy offer next to an earn-out-heavy one and the difference is often larger than owners expect.
Terms that protect you
- A clear, simple measure. Revenue or gross profit are harder to manipulate than net profit after group charges.
- Defined accounting rules, matching how the business has been run, so the targets cannot be missed through a change of policy.
- Protection of the business you sold, so the buyer cannot move customers, staff or costs in a way that destroys the earn-out.
- Acceleration of the payment if the buyer sells the business, merges it or breaks those protections.
- Partial payment for partial performance, rather than all or nothing.
- A sensible length. The longer the earn-out, the more can change.
Tax
Earn-outs can be taxed in different ways depending on how they are structured, and that can affect when tax falls due and whether Business Asset Disposal Relief applies to the deferred part. Have your tax adviser model the structure before you agree the heads of terms, not after.
Our view
An earn-out is not a bad thing in itself. A badly defined one is. The owners who come out of earn-outs well are the ones who negotiated the definitions as hard as the headline price, and whose businesses were ready enough that only a small part of the price needed to be earned. Read how to sell your business for where the earn-out fits in the wider deal.
Common questions
What is an earn-out?
An earn-out is part of the sale price that is only paid if the business hits agreed targets after the sale, usually measured over one to three years. It moves risk from the buyer to the seller.
Is an earn-out a good idea?
It can bridge a genuine gap between what you believe the business is worth and what a buyer will pay today. It is risky when you no longer control the things that decide whether the targets are met, so the terms matter as much as the amount.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
