Earnouts: how they work, how long they last and how to protect your payout

What is an earnout?

An earnout is part of your sale price that you receive after closing, but only if the company hits agreed targets. Both sides agree on the targets, the time period and the payment up front. The rest of the price is paid at closing.

Auxo Capital Advisors, an M&A advisory firm, defines an earnout as “contingent purchase price paid after closing only if the acquired business achieves agreed financial or operating targets during a defined period.” Lawyers and accountants also call it contingent consideration.

Here is a simple example. This one is for illustration only. A buyer offers $20 million. You want $24 million because you believe growth is coming. The buyer is unsure. They agree on $20 million at closing and up to $4 million more if revenue passes a set level in the next two years. The earnout closes a price gap with money that depends on results.

An earnout is one of three parts you may see in a private equity offer. Altair Advisers wrote in 2025 that private equity transactions usually include cash, rollover equity and earnout payments. Read about the second part in our guide to rollover equity. Our glossary defines earnout in short form.

Why do buyers and sellers use earnouts?

Earnouts close price gaps. A seller sees growth coming. A buyer sees risk. The earnout lets the buyer pay more only if the growth shows up, and lets the seller keep the upside if it does.

The Harvard Law School Forum on Corporate Governance, in a July 2025 post by the law firm A&O Shearman, lists the main reasons. Earnouts can help deal with uncertainty in a company’s revenue or growth. They can keep sellers committed to the business after closing. They can reduce the cash a buyer pays at closing. They can resolve valuation gaps when there are few comparable deals.

Earnouts cost something too. The same post warns that earnouts are “typically bespoke, highly negotiated, and can lead to disputes if not carefully structured.” Often a dispute simply moves the price fight to after closing.

How common are earnouts, and how big are they?

Earnouts appear in roughly one in five private deals outside life sciences. When they appear, the median earnout is about 31% of the closing payment, according to the 2025 SRS Acquiom study cited in a July 2025 Harvard forum post.

The post says close to one in five private deals outside life sciences used an earnout over the past decade. It also reports use rose from 15% in 2019 to a high of 30% to 37% in 2023, then settled to about 22% in 2024. Cantrell Law Firm, citing the American Bar Association’s 2025 study, puts recent mid-market use at roughly 18%.

These are market-wide figures, not a forecast for your deal. Your terms depend on your company and your buyer.

How long does an earnout last?

Most earnouts last one to three years. The median outside life sciences is 24 months. Longer periods raise your risk, because more can change in the business and more of your price depends on outside events.

Cantrell Law Firm says most earnouts last between one and three years. The Harvard forum post reports the median period at 24 months outside life sciences. Life sciences deals often run three to five years or longer.

Sellers generally prefer shorter periods. Cantrell Law Firm explains why: sellers limit their exposure to credit risk and are paid sooner. But a seller who stays on to manage may want a bit more time to hit targets. Buyers also like short periods, because many of the seller’s protections end when the earnout ends.

The Harvard forum post adds a rule of thumb: the more money in the earnout compared with the upfront price, and the longer it runs, the more likely a dispute. Keep both numbers modest where you can.

What targets do earnouts use?

Most earnouts use a financial target. Revenue is the most common, followed by earnings or EBITDA. Some add non-financial goals such as customer retention. Each metric favors one side, so choose with care.

The Harvard forum post says sellers generally favor revenue targets, “less vulnerable to manipulation through changes in cost structure or accounting treatment.” Buyers typically prefer net income or EBITDA. EBITDA often emerges as the compromise. See EBITDA and adjusted EBITDA in our glossary.

Cantrell Law Firm gives a clear rule. Accept an earnout “only when the metric is one the buyer cannot easily manipulate (revenue or gross profit rather than net income).” Ask your lawyer how each metric would be counted if the buyer folds your company into another business.

How can you protect your earnout payment?

Write the protections into the contract. After closing, the buyer runs the company, so you need clear limits on what the buyer can do. A target is only as safe as the covenants behind it.

The Harvard forum post lists protections sellers commonly ask for. The buyer will:

• operate the business consistent with past practice or an agreed plan;
• use commercially reasonable efforts to reach the earnout;
• not act in bad faith to reduce the payout;
• run the company as a stand-alone business or division;
• keep separate books and give you access to them;
• keep a minimum level of working capital;
• not take on new debt above a set amount; and
• not sell part of the business.

The post also says buyers “generally will resist” covenants that interfere with how they run the company, especially any duty to take steps to maximize the earnout. So expect to negotiate. Cantrell Law Firm adds two more items to seek: audit and dispute rights and faster payment if the buyer resells or merges the business.

Use this checklist when you read an offer.

1. What exactly is measured, and who calculates it?
2. Which accounting rules apply, and can the buyer change them?
3. Are costs from the buyer’s other businesses kept out of your numbers?
4. Can you see the books during the earnout period?
5. What happens if the buyer sells the company or merges it with another?
6. Is there a cap, a floor or a sliding scale?
7. Who decides a dispute, and how fast?

Walk through this list with your lawyer before you sign a letter of intent. Earnout terms are easier to set at that stage than later.

What risks come with an earnout?

The main risk is that you never receive the money. Targets can be missed for reasons you do not control. Buyers may change the business. Disputes can drag on. You should value an earnout as uncertain money, not as cash.

A few common risks:

• Integration. If the buyer merges your company into its own operations right away, it becomes hard to measure your results. Cantrell Law Firm warns that disputes are almost guaranteed in that case.
• Control. You may not control pricing, hiring or spending after closing.
• Credit risk. The payment depends on the buyer being able to pay when the date comes.
• Tax. How the payment is taxed depends on how the contract describes it. Ask your tax adviser or lawyer.

Compare offers on a risk-adjusted basis. A smaller offer with more cash at closing can beat a larger offer with a large earnout. Our guide to how private equity values a business shows how buyers build a price.

Earnouts, escrow and rollover: how do they compare?

Each tool holds back part of the price in a different way. Escrow holds cash for a short time to cover claims. Rollover keeps you invested. An earnout ties payment to results. Many deals use more than one.

Ask each buyer to show a full table of cash at closing, deferred amounts and conditions. Then compare offers line by line.

Next step

Capstreet states it makes primarily majority investments, and entrepreneurs reinvest alongside Capstreet. To see whether your company fits, review our deal criteria and the page on selling your business to private equity. When you are ready, start a confidential conversation at /contact, call 713-332-2700 or email connect@capstreet.com.