Few words in M&A trigger as much emotion as “earnout.”
If you’ve ever talked to someone who sold their agency, chances are you’ve heard horror stories:
“We never got our earnout.”
“They changed the rules after closing.”
“It was just a way to shortchange us.”
And I get it. I’ve been on both sides of earnouts — as a seller and as a buyer — and I can tell you this: earnouts can be frustrating when structured poorly, but powerful when done right.
So what exactly is an earnout?
An earnout is a portion of the purchase price that’s paid later, based on the performance of the business after the sale. It’s typically tied to metrics like revenue, EBITDA, or client retention.
Here’s why earnouts exist:
- To bridge valuation gaps. Maybe you think your agency is worth $10M, but the buyer thinks it’s worth $8M. An earnout can close that gap if the business performs as you expect.
- To align incentives. The buyer wants to ensure you stay motivated after the sale. The seller gets upside if the company continues to grow.
- To manage risk. Buyers want to make sure that key clients or staff don’t vanish post-close. Earnouts reduce their downside if things change.
Now, the bad reputation comes from poor design — vague metrics, unfair control, or lack of transparency. If you’re staying on post-sale but the buyer controls the levers that determine your payout, you’ve just given them the ability to “move the goalposts.”
The key is to structure earnouts clearly and fairly:
✅ Define metrics precisely (e.g., “Revenue from existing clients” vs. “total revenue”).
✅ Agree on what’s in your control.
✅ Set timelines that are realistic (usually 1–3 years).
✅ Align reporting and visibility so you can track performance.
When structured this way, earnouts can actually be a win-win. I’ve seen sellers double their initial payout because the business exceeded expectations. In those cases, the earnout wasn’t a burden — it was a reward.
From a buyer’s perspective (mine included), nothing makes me happier than paying an earnout. It means the acquisition worked. It means the founder stayed engaged, clients were retained, and the company grew. That’s a win for everyone.
So before you write off earnouts as “bad,” understand what they really are: a tool. Like any tool, it depends on how it’s used.
👉 If you sold your agency tomorrow and had to choose — would you prefer all cash up front, or a lower upfront price with a chance to earn more later?
Contact us if you’re and agency owner and have considered selling or joining something bigger.