How to negotiate an earn-out when selling your business

To negotiate an earn-out, agree how the payment is calculated, what can change the result, who controls those decisions and how you can verify and enforce payment. Compare the cash you receive at completion with the amount that depends on future events. Do not treat the maximum headline price as guaranteed proceeds.

An earn-out can bridge a genuine disagreement about future performance. It can also turn a straightforward price discussion into several years of accounting, operational and contractual risk.

The right question is not simply whether the target looks achievable today. It is whether the agreement still works after the buyer takes control.

What is an earn-out?

An earn-out is part of a purchase price that depends on specified performance or other agreed conditions after a sale. The measure might be EBITDA, revenue, customer retention or another defined outcome. BDO's earn-out guide explains the mechanics and common areas of disagreement.

Distinguish it from other forms of consideration:

Fixed deferred consideration still carries risk. It is simply not the same risk as having to meet a future performance target.

First compare what is certain with what is conditional

Consider two simplified hypothetical offers for the same shareholding, after agreeing the same debt and working-capital basis:

• Offer A: £1.5 million in cash at completion.
• Offer B: £1 million in cash at completion, plus an earn-out of up to £800,000.

Offer B has the larger maximum price. It also starts with £500,000 less cash at completion. You would need to receive more than £500,000 of the earn-out just to exceed Offer A on an undiscounted, pre-tax basis.

Payment timing, tax, your required involvement and the probability of payment still need assessment. There is no reliable shortcut that says every earn-out should be discounted by the same percentage.

Build at least a downside, a realistic working case and an upside case. Do not use the maximum as your household financial plan.

1. Define the target and the full payout formula

“EBITDA above plan” is not an adequate definition. Identify the business being measured, the accounting period, currency, threshold, cap and treatment of partial performance.

Is there a cliff, where narrowly missing a target produces no payment? Is payment linear between two points? Does exceeding one year's target offset a shortfall in another? Can the total exceed the stated cap?

Here is an illustrative linear arrangement, not a market standard:

At £525,000 of defined EBITDA, the calculation is £125,000 × 4 = £500,000. Under a different agreement with an £800,000 all-or-nothing threshold at £600,000, the same performance could produce nothing.

Model several outcomes before agreeing the formula. The shape matters as much as the target.

2. Agree accounting rules before arguing about forecasts

If the earn-out uses profit, define how profit is calculated. Discuss revenue recognition, bad-debt provisions, capitalisation, stock, exceptional items and the hierarchy of accounting policies.

Specify the treatment of acquisition, integration and group charges. What happens if the buyer moves finance, IT or management costs into the acquired company? What happens if contracts or customers move to another group entity?

BDO identifies accounting policies, opening positions and calculation disagreements as recurring earn-out issues. The solution is not a blanket assumption that every new cost is unfair. It is a clear agreed basis for the measure.

An EBITDA definition used to price the sale does not automatically become the earn-out definition. Compare them explicitly.

3. Match operational obligations to the performance measure

After completion, the buyer may legitimately want to integrate systems, change pricing, hire people or invest for growth. Some decisions can reduce the short-term measure used for your earn-out even if they benefit the wider group.

Discuss the decisions that could materially affect payment:

• Resource levels, agreed budgets and access to necessary investment.
• Customer allocation and revenue booked elsewhere in the group.
• Changes to products, pricing, locations or the operating model.
• Group charges and integration costs.
• A sale, closure or material restructuring of the measured business.

Your advisers can help negotiate appropriate obligations, consent rights or calculation adjustments. The buyer will also need the ability to run the business. A term you cannot realistically agree or enforce is not a protection simply because it appears in your wish list.

4. Separate your employment from the purchase price

If you remain involved, agree your responsibilities, authority, remuneration and availability. Do not allow a vague obligation to “support the business” to become an unlimited commitment.

Review what happens to the earn-out if you are dismissed, become ill, resign, lose decision-making authority or face a material change in role. Good-leaver and bad-leaver definitions need particular attention. They can affect payment even where the business performs well.

Get specialist tax advice before agreeing the arrangement. HMRC lists factors relevant to whether an earn-out is sale consideration rather than employment remuneration, including links to future employment and personal performance. That guidance concerns employment-related securities and does not by itself determine the full capital gains treatment of a deal.

Calling a payment an earn-out does not settle its tax treatment, and continuing employment does not automatically settle it either.

5. Agree information rights and a dispute process

You need a practical way to check the calculation after you no longer control the accounts.

Discuss the reporting timetable, supporting records, who prepares the calculation and how long you have to challenge it. Establish what happens if information arrives late or a deadline is missed.

Agree the dispute route and the decision-maker's remit. An accountant determining a calculation dispute is not necessarily deciding a separate claim that the buyer breached an operating obligation. Your lawyer should make those boundaries clear, including cost allocation and enforcement.

Do not wait until the final payment date to discover that the agreement gives you a number but no useful way to examine it.

6. Assess whether the buyer can pay

Meeting the target is only one part of receiving the money. Identify the entity obliged to pay, its resources and the effect of any permitted set-off or competing claims.

Ask advisers whether security, guarantees, escrow or other protection is appropriate and achievable. Those arrangements have costs and limitations; none should be described as automatically removing all payment risk.

Compare a secured fixed payment, an unsecured promise and contingent consideration on their actual terms rather than placing all future amounts in one “deferred” column.

What to discuss at heads of terms

Resolve the main economics and risk allocation early enough to influence the decision to proceed. A useful discussion should cover:

1. Cash at completion, maximum conditional payment and timing.
2. The metric, period and payout formula, with examples.
3. Core accounting principles and treatment of material group actions.
4. Your post-sale role and circumstances affecting entitlement.
5. Reporting, challenges, payment obligations and proposed protections.

Heads of terms are often largely non-binding, while some provisions may be binding. Do not assume they secure an enforceable earn-out. Have your lawyer distinguish what is agreed in principle from what needs to be carried into the definitive documents.

Questions founders ask about earn-outs

Is a revenue earn-out safer than an EBITDA earn-out?

Not automatically. Revenue can avoid some cost-allocation disputes, but it still depends on definitions, contract allocation, pricing and buyer decisions. It may also reward unprofitable sales. Choose a measure appropriate to the business and assess what can affect it.

Should I refuse an earn-out altogether?

That depends on your objectives, alternatives and the terms. An earn-out may create a workable deal when expectations differ. It may be unsuitable if you need certainty, want to leave quickly or cannot influence the relevant risks. Assess the whole offer rather than accepting or rejecting the label.

What if I have already signed and a dispute is developing?

Review the agreement and get legal and financial advice promptly. Preserve relevant records lawfully, record calculation differences and check notice and challenge deadlines. Do not assume commercial unfairness proves breach, or take retaliatory action that creates another problem.

General negotiation preparation, not legal, tax or investment advice. Worked offers and payout formulas are hypothetical, not market benchmarks or recommended contractual wording.