Earn-Out in Business Sales: A Step-by-Step Guide to Negotiating It Right

An earn-out is one of the most effective tools in M&A to bridge the valuation gap between buyers and sellers. When both parties agree that a business has value but disagree on exactly how much, an earn-out allows part of the purchase price to depend on the company's future performance. If you are considering selling your business, understanding how earn-outs work could make the difference between closing a deal and walking away empty-handed.

What Is an Earn-Out and When Is It Used?

An earn-out is a deferred pricing clause in which the seller receives part of the sale price based on the company's results after the transaction closes. In practice, not all of the purchase price is paid at closing — a portion depends on meeting agreed performance targets.

Earn-outs are typically used in three situations:

• When buyer and seller cannot agree on the company's valuation.
• When the business has uncertain future prospects that the buyer wants to hedge against — pending contract renewals, projects in progress, or key-person dependency.
• When the seller wants to stay involved in the business and share in its future upside.

Earn-outs are particularly common in service businesses, technology companies, and professional services firms where value is tied to people, contracts, or projects still in progress.

How an Earn-Out Works: Step by Step

Step 1: Define the Fixed Payment and the Variable Component

The first task is to agree on how much is paid at closing — the upfront payment — and how much is deferred as earn-out. A common range in SME transactions is 20 % to 40 % of the total price deferred. A higher proportion creates friction and makes the deal harder to close.

Example: on a €3 million deal, €2.1 million might be paid at closing, with €900,000 subject to earn-out over two years.

Step 2: Choose the Performance Metric

This is the most critical negotiation point. The metric defines what gets measured. The most common options are:

• EBITDA: the most widely used in SME transactions — robust and hard to manipulate in the short term.
• Revenue: simpler to measure but gives the buyer less control over profitability.
• EBIT or net profit: valid but more susceptible to accounting changes introduced by the buyer.
• Specific milestones: signing a key contract, obtaining a certification, or launching a product.

Sellers should prioritize metrics they can genuinely influence and that cannot easily be altered by the new owner's management decisions.

Step 3: Set the Earn-Out Period

Earn-outs typically run for one to three years. The longer the period, the greater the risk to the seller, as the buyer controls the business during that time and can influence results. Shorter periods with clear metrics and regular reviews are better for sellers.

You also need to decide whether earn-out payments are made annually — partial payments each year — or in a single lump sum at the end. Annual payments are generally more favorable to the seller.

Step 4: Negotiate Seller Protections

This is the most overlooked step and the biggest source of disputes. Once the deal closes, the buyer runs the company. Without agreed protections, they can make decisions that reduce reported performance and therefore the earn-out payout.

Common seller protections include:

• Operating covenants: commitments from the buyer to maintain certain operational parameters during the earn-out period.
• Anti-dilution clauses: preventing the buyer from restructuring the business in ways that affect the agreed metric.
• Information rights: the seller must have access to the financial data used to calculate the earn-out.
• Acceleration clause: if the buyer sells the company during the earn-out period, the seller automatically receives the maximum outstanding amount.

Step 5: Draft the Clauses in the SPA

Everything agreed must be captured precisely in the Share Purchase Agreement. Earn-out clauses are among the most complex in any acquisition contract and require specialized M&A legal advice. Ambiguous wording is a guaranteed recipe for litigation. Pay close attention to the exact definition of the metric, permitted accounting adjustments, and the dispute resolution mechanism.

Earn-Out Pros and Cons for the Seller

Advantages for the seller:

• Allows the deal to close despite a valuation gap.
• If the business outperforms, the seller may receive more than the originally agreed price.
• Signals confidence in the business's future potential.

Disadvantages for the seller:

• Deferred payments carry the risk of non-payment or underperformance.
• The seller loses control but retains performance risk.
• Potential conflicts if the buyer makes decisions that hurt the metric.
• The seller typically must remain involved in the business during the earn-out period.

Common Earn-Out Negotiation Mistakes

In our experience advising on M&A transactions, these are the most frequent mistakes:

1. Agreeing on a metric the seller cannot control. Net profit, for example, can be reduced if the buyer takes on debt or restructures costs.
2. Failing to define permitted accounting adjustments. How is an extraordinary investment treated? What about a change in amortization policy? If it is not in the contract, there will be a dispute.
3. Overlooking the dispute resolution mechanism. If the parties disagree on the earn-out calculation, who decides? Agreeing on an independent auditor upfront saves time and money.
4. Accepting an earn-out period that is too long. Three years is a reasonable limit. Beyond that, uncertainty multiplies and the interests of buyer and seller diverge too much.
5. Not planning for a buyer resale. Without an acceleration clause, the seller may be left exposed if the buyer sells the company mid-earn-out.

Earn-Outs in M&A: Context and 2026 Trends

Earn-outs have become increasingly common in M&A transactions in recent years. Higher interest rates and greater buyer caution have pushed more deals toward variable pricing structures. Industry data suggests that over 35 % of SME acquisitions in Spain in 2025 included some form of earn-out component, up from around 22 % in 2020.

In technology, healthcare, and professional services, the proportion is even higher. The reason is straightforward: the value of these businesses depends largely on future contracts, key people, and projects in progress — all of which are hard to value with certainty at closing.

For 2026, the trend points toward more sophisticated earn-out structures with multiple metrics and shorter periods, designed to better align the interests of both parties.

Frequently Asked Questions About Earn-Outs

Is an earn-out tax-efficient for the seller?

In Spain, earn-out payments received by individuals are typically taxed as capital gains under the IRPF (Spanish personal income tax), at savings rates ranging from 19 % to 28 % in 2026. However, the exact tax treatment depends on the deal structure, so advice from a tax specialist with M&A experience is essential before signing.

What if the business underperforms due to factors outside the buyer's control?

It depends on the contract. That is why it is essential to include clauses specifying how extraordinary events — market crises, regulatory changes, force majeure — are treated. The most common approach is to agree on a minimum guaranteed earn-out or an adjustment mechanism for exceptional circumstances.

Can earn-outs apply to a partial acquisition?

Yes. In deals where the buyer acquires only part of the equity — say, 60 % — the earn-out can apply to the price paid for those shares. These situations require even more careful negotiation, because the seller remains a shareholder and both parties must manage the business together during the earn-out period.

How does Fundenza help with earn-out transactions?

At Fundenza we support business owners through every stage of a sale, including structuring and negotiating earn-out clauses. We analyze the most appropriate metrics for each business, negotiate seller protections, and work with specialist lawyers to ensure the contract accurately reflects what was agreed. If you are considering selling your business, contact us for a no-obligation initial conversation.