What Is an Earn-Out and Why a Buyer Might Suggest One

“What is an earn-out?” I hear you ask. When you sell your business, not every pound of the sale price always lands on day one.
Sometimes, part of the payment depends on how the business performs after completion.
That’s where the earn-out comes in.

Earn-outs can sound complicated (or even risky) but used correctly, they can be mutually beneficial.
For some sellers, they represent ongoing upside.
For others, they’re a point of caution.

At Epitome Capital, we’ve seen both sides. And here’s what every seller should know.

---

What Exactly Is an Earn-Out?

In simple terms, an earn-out is a performance-based portion of the sale price.
The buyer initially pays only part of the full price. They agree to pay the seller additional sums later. This occurs if certain targets are achieved..

Those targets might include:

• Revenue growth
• Profit or EBITDA levels
• Retention of key customers or staff
• Expansion milestones

So, if your business continues performing as promised, you “earn out” the rest of the price.

---

Why a Buyer Might Suggest an Earn-Out

From a buyer’s point of view, an earn-out isn’t a trick. It’s a way to align incentives, particularly when:

• The business’s success is closely tied to the seller’s leadership
• Future growth depends on relationships or contracts not yet tested
• Market conditions are uncertain
• The buyer wants reassurance that performance claims are realistic

An earn-out helps a buyer manage risk without devaluing the business upfront.
For them, it’s about protection and performance continuity.

But for you, the seller, it’s about clarity and control.

---

When Earn-Outs Make Sense (and When They Don’t)

Earn-outs can be a fair, intelligent part of a deal, if they’re built on trust and transparency.

They make sense when:

• The seller plans to stay involved post-sale for a handover period
• Both sides agree clearly on what “success” means
• The metrics are measurable, realistic, and independently verifiable

They don’t make sense when:

• Targets are vague or subjective (“improved customer sentiment,” for example)
• You have little control over the outcome
• You’re fully exiting immediately and have no influence on future performance

In those cases, the earn-out can feel like a promise that’s impossible to cash.

---

How to Protect Yourself in an Earn-Out

Even in good-faith deals, protection matters.
Here are five quiet but critical steps:

1. Define the Metrics, Don’t Assume Them

Spell out exactly what triggers payments, how it’s calculated, by whom, and under what conditions.
The word “EBITDA” alone can hide pages of definitions.

2. Secure Independent Verification

If the earn-out depends on financials, take measures to ensure an external accountant or auditor validates the figures. It should not just be the buyer’s team validating the figures.

3. Stay Involved (to a Degree)

If the buyer’s performance affects your payout, it’s reasonable to negotiate limited operational visibility during the earn-out period.

4. Negotiate a Minimum or Floor Payment

If possible, structure a base level of deferred payment regardless of performance, to avoid total loss of upside.

5. Time-Bound It

Keep the earn-out window short, ideally 12–24 months.
Beyond that, alignment weakens and risk compounds.

---

A Quiet Buyer’s View

As direct buyers, we sometimes suggest earn-outs, but never as leverage.
We use them to build trust and reward continuity, especially when a founder’s knowledge or relationships are key to transition.

If an earn-out is structured fairly, it becomes a bridge, not a burden.

But fairness depends on communication.
The earn-out should never replace goodwill. It should reflect it.

---

The Best Earn-Outs Work Both Ways

An earn-out should be an extension of mutual respect, not a test of endurance.
It only works when both sides understand that business performance after sale depends on trust, transparency, and shared success.

If you’re approached with an earn-out proposal, don’t rush.
Ask questions.
Get clear definitions.
And remember: the best deals are structured with clarity before completion, not regret after it.

---

If you’ve been offered a deal involving an earn-out and want a second opinion (quietly) we can help.

We’re not brokers.
We’re direct UK business buyers who’ve seen how earn-outs succeed and how they fail.

Reach out for a private, no-pressure conversation.
We’ll walk you through what a fair structure really looks like, before you sign anything.