Earn-out
An earn-out is part of the purchase price paid after closing, contingent on the business meeting agreed targets.
In a sale
When is an earn-out fair?
An earn-out is fair when the founder stays in a role that influences the result and the buyer cannot influence the metric; one the founder cannot control is better read as a price cut than as part of the price. It bridges a gap between what a founder believes the business is worth and what a buyer will underwrite.
Where it comes up
Read it in context
In the articles
- Where founders leave money on the tableMost of what founders lose in a sale is lost in their own decisions, and each one has a fix.
- The 4.5x problemMost founders assume their business is worth the trade multiple. That assumption costs millions.
- Same business, two outcomesTwo identical businesses, one prepared and one not, sell for very different prices.
- What an LOI is really sayingThe headline is one term of nine. Here are the other eight.
- The second biteIn the right recap, the second sale is larger than the first. In the wrong one, it is zero.
- The owner-dependency trapThe more the business needs you, the less a buyer pays, and the longer you stay.
- When a buyer calls firstAn inbound offer is information, not a decision.
- Diligence yourself firstEvery business has issues. The question is who finds them.
- Strategic, platform, add-on, sponsor: who buys whatDifferent buyers pay for different things. The process should include several.
- What the buyer's memo says about youBefore any offer, someone writes an internal memo. Here is what is in it.
- Structure is priceTwo offers with the same headline can differ by millions in what you keep.
In The FNDRS Playbook
- PB05 The owner dependency scaleThe more the business needs you, the less a buyer will pay for it.
- PB06 The exit readiness matrixValue and readiness are different things. Both decide the outcome.
- PB13 Headline vs. take-homeTwo offers with the same headline can differ by millions in what you keep.
- PB14 The consideration stackPurchase price is a stack of layers with different certainty and different timing.
- PB15 The certainty curveStructure trades certainty for upside. Know where you want to sit.
- PB18 The earn-out design gridAn earn-out you cannot control is a price cut with extra steps.
See the terms with your own numbers
The Go-To-Market Analysis (GTMA) builds the file a buyer would build on your business, before a buyer does.