Earnout Agreements and Structures: A Business Owner’s Guide with Industry Data

Often when owners get offers for their business, they’ll contain an earnout agreement. This is when a portion of the purchase price isn’t guaranteed. Instead, it’s tied to an earnout contingent on hitting performance targets after the sale closes, and you no longer fully control the business. This can significantly impact your exit planning, as it affects the amount of cash you receive at close.

Earnout agreements are common in middle-market M&A transactions. They’re by no means a given, and their prevalence and structure vary by industry. Understanding how earnouts work, what’s typical in your industry, and how to negotiate favorable terms can mean the difference between achieving your ideal exit and leaving substantial money on the table — or worse, finding yourself in disputes over payments you thought were guaranteed.

The best way to navigate earnouts is by working with an M&A advisor. M&A advisors can create ideal conditions for your exit where earnouts play less of a role in your final price. Though keep in mind that with some industries, earnouts are hard (if not impossible) to avoid. In these cases, your M&A advisor will make sure the earnout agreements and structure are favorable for you.

Given their expert insight into how common earnouts are, we spoke with several M&A advisors to help write this guide, where we cover:

• What Is an Earnout Agreement?
• Why Do Buyers Use Earnouts?
• How Earnouts Are Structured
• The Risks of Earnouts (and How to Mitigate Them)
• The Benefits of Earnouts for Owners
• Earnout Agreements by Industry
• How M&A Advisors Can Help You Find the Best Deal

What Is an Earnout Agreement?

An earnout agreement is a deal structure in which a portion of the purchase price is deferred and contingent upon the business achieving specific financial or operational targets after the acquisition.

Unlike cash at close (immediate payment) or seller financing (deferred payment regardless of performance), earnouts directly tie your payout to future results under new ownership.

Sometimes, earnouts are tied to metrics that show your business has grown. But as Ryan Mingus of TUSK Practice told us, “Some earnouts are not about growth, but about maintaining the business’s value at the time of the sale.”

Maintaining current revenue is far different from being required to grow EBITDA by 15% annually while someone else controls pricing, staffing, and strategic decisions. This brings us to how earnouts are structured.

Why Do Buyers Use Earnouts?

Earnouts serve multiple purposes from the buyer’s perspective. Most obviously, they bridge valuation gaps when you and a potential buyer disagree on the business’s worth. If you believe your business is worth $8 million but buyers are only comfortable paying $6 million upfront due to high customer concentration, then a $2 million earnout based on maintaining revenue might help close the gap.

Seen this way, an earnout is about the buyer mitigating risks. An example is when a buyer uses earnouts to mitigate the risk of clients churning after you leave as the owner. When your personal relationships with customers or clients represent significant value, buyers worry about what happens post-closing if you move on to your next venture. An earnout keeps you engaged and incentivized during the critical transition period.

There’s another aspect of why buyers use earnouts: it’s an inexpensive way to fund part of the transaction. Rather than securing additional debt or equity capital, they’re essentially using your business’s future earnings — money that wouldn’t exist without your continued involvement — to pay you.

How Earnout Agreements Are Structured

There are several parts of an earnout’s structure, and all of them are details that need to be negotiated to make sure you’re getting a fair deal. Your buyer is trying to mitigate risk and lower costs, while you’re trying to reduce risk and increase your overall exit. While these may seem like they’re at odds, there is common ground to be found in a good, clear-headed negotiation.

When you work with an M&A advisor, you get:

• Industry insight on what kind of earnouts are normal or common for a company like yours
• An increased buyer pool, so you have more buyers competing to acquire your company
• An objective representative who can keep a cool head during negotiations

When it comes to negotiating an earnout, your M&A advisor is going to look at things such as:

1. Earnout Percentage and Dollar Amount

The portion of the total purchase price tied to earnout provisions varies dramatically by industry and deal specifics. Your M&A advisor will have past deals they’ve handled, which provide valuable insight into what is common in your industry.

For example, Patrick’s data at BMG shows that around 5% or less of the deals he’s done in the HVAC industry contain an earnout provision. Meanwhile, the two M&A advisors we spoke to regarding digital marketing agencies show that 20–50% of deals contain an earnout.

You want to factor in what is normal within your industry, but what makes sense based on the deal structure. Ryan Mingus from Tusk shared that “higher earnout percentages can make sense when there’s zero equity rollover, since you’re not taking on the additional risk of holding equity in the new entity.”

The key is balancing total risk exposure across all deferred or contingent compensation components.

2. Time Period

Most earnout agreements span one to three years, although this is not a hard-and-fast rule.

The key thing to know is that the earnout period represents how long you remain accountable for performance metrics after closing. Shorter periods reduce your risk exposure and uncertainty. Longer periods give buyers more confidence about business sustainability, but increase your vulnerability to factors outside your control.

The appropriate length for you will depend on your business’s stability, the buyer’s risk tolerance, and your willingness to remain involved.

3. Performance Metrics

The metrics that determine earnout payouts are among the most heavily negotiated terms. The two most common approaches are EBITDA-based earnouts and revenue-based earnouts, and each has distinct advantages and risks.

Buyers typically prefer EBITDA-based earnouts because EBITDA measures profitability, not just top-line growth. From their perspective, revenue growth that comes at the expense of margins doesn’t create value.

However, EBITDA-based earnouts expose sellers to significant risk because the new owners control expense allocation. They decide what corporate overhead gets pushed down to your business unit, how much to invest in marketing, what salaries to pay, and countless other decisions that affect EBITDA but may be outside your control.

As an owner, you’ll usually want to push for revenue-based earnouts. In industries like digital marketing, that often means using Adjusted Gross Income (AGI) instead.

As David Tobin explains, “These top-line metrics are less controllable by new ownership. You’re concerned about whether you truly control the P&L statement during the earnout period and whether there will be variables out of your control that prevent you from earning what you expected.”

Other performance metrics might include customer retention rates, specific operational milestones, or recurring revenue targets.

The key is ensuring the metrics align with what you can actually influence post-acquisition.

4. Calculation and Verification

Your earnout agreement should specify exactly how metrics are calculated, what expenses count against EBITDA, how revenue is recognized, and what happens with extraordinary items or accounting changes.

Equally important are your audit rights and access to financial information during the earnout period. You need regular reporting on performance against earnout metrics and the ability to verify those calculations. Without robust audit rights, you’re dependent on the buyer’s goodwill and accounting interpretations — a vulnerable position when substantial money is at stake.

5. Control Considerations

Perhaps the most critical of earnout agreements is the control question: how much influence do you retain over the factors that determine earnout payouts?If you’re hitting your customer retention targets but the buyer changes the pricing strategy or cuts the marketing budget in ways that impact revenue, can you still earn the earnout? If corporate overhead allocations suddenly increase, reducing EBITDA, do you have recourse? These are common sources of earnout disputes.

To start the process of finding the right M&A advisor for you, schedule your free exit consultation.

The Risks of Earnout Agreements (and How to Mitigate Them)

While earnout agreements serve legitimate purposes in M&A transactions, there are risks associated with them that you, as an owner, need to be aware of before you agree to anything. M&A advisors will work on your behalf to mitigate these risks through precise language and a favorable earnout structure in the agreement.

These risks include:

1. Losing control over performance drivers

The fundamental problem with earnouts is misaligned authority and accountability. You’re held accountable for hitting performance metrics, but you may not control the decisions that determine whether those metrics are achievable. The new owners decide pricing strategy, marketing budget, hiring and firing, customer service quality, and countless other factors that directly impact revenue and profitability.

For example, if the acquirer decides to raise prices and you lose customers as a result, that can affect your earnout. If the new owners cut marketing spend to boost short-term EBITDA for their own purposes, that may hurt your revenue-based earnout. You’re in the passenger seat but still responsible for the destination.

2. Metric manipulation and accounting concerns

EBITDA-based earnouts are particularly vulnerable to this risk. The new ownership controls expense allocation and accounting decisions. What corporate overhead gets pushed down to your business unit? How is revenue recognized? What gets capitalized versus expensed? These aren’t just academic accounting questions — they directly determine whether you hit earnout thresholds.

Even with the best intentions, the acquirer’s accountants may interpret EBITDA calculations differently than you expected. Without robust audit rights and clear definitions in your earnout agreement, you may find yourself arguing over what seemed like straightforward metrics.

3. Life changes during the earnout period

When you sign an earnout agreement with a two or three-year performance period, you’re committing to remain involved in the business for that entire duration. But life doesn’t always work with transaction timelines. Health issues, family emergencies, or simply burnout after years of running the business can all interfere with your ability to meet earnout obligations.

Unlike cash at close, which you receive regardless of what happens next, earnout payments depend on your continued performance. That creates stress and constrains your freedom precisely when you thought you were selling to gain more freedom and flexibility.

4. Dispute resolution challenges

What happens when you believe you’ve earned the earnout but the buyer disagrees? Earnout disputes are common in M&A transactions, and they’re expensive and time-consuming to resolve. Legal battles over earnout calculations can easily cost six figures in attorney fees and take years to work through arbitration or litigation.

Even if you ultimately prevail, the process is adversarial and damages your relationship with the acquirer. This is particularly problematic if you rolled equity and still have ownership in the business, or if you were planning to work with the acquirer long-term.

While these earnout risks are real, experienced M&A advisors use several strategies to mitigate them.

• M&A advisors will insist on clear, unambiguous performance metric definitions in the purchase agreement. You don’t want to leave anything to interpretation or “good faith” determinations. You want your earnout agreement to define exactly how EBITDA or revenue will be calculated, what constitutes extraordinary items, and how disputes will be resolved.

• M&A advisors will negotiate regular reporting requirements and robust audit rights. You should receive monthly or quarterly reports showing performance against earnout metrics, and you should have the right to audit those calculations with your own accountant.

• M&A advisors will push for reasonable seller control provisions. While you won’t maintain complete control post-acquisition, your earnout agreement can include provisions requiring consultation on major decisions affecting earnout metrics, or protecting you from arbitrary changes that make targets unachievable.

Your M&A advisor may also explore floor guarantees — minimum payouts regardless of performance. Some earnout structures include a minimum payment (perhaps 50% of the earnout amount) even if targets aren’t met, with additional upside if performance exceeds expectations. This reduces your downside risk while maintaining the buyer’s upside protection.

The Benefits of Earnouts for Owners

Despite the risks, earnout agreements can serve your interests in specific situations. They can unlock higher total valuations than all-cash offers, particularly if you’re confident in maintaining or growing performance post-sale. If your business is performing well and you expect that to continue, an earnout lets you capture more total value.

Earnouts also expand your pool of potential buyers. Some buyers who can’t or won’t pay your asking price in cash might be willing to pay more if a portion is contingent on future performance. This is particularly relevant in today’s higher interest rate environment, where debt financing is more expensive and buyers are more cautious.

For business owners who aren’t ready to completely step away, earnout agreements can provide ongoing involvement and income during a transition period. This can be particularly appealing if you’re passionate about the business but need to reduce your day-to-day responsibilities or unlock liquidity for diversification.

Earnout Agreements by Industry: Insights from Real M&A Advisors

Earnout prevalence and structure vary dramatically across industries. Understanding what’s typical in your sector helps you evaluate whether a specific offer is reasonable or aggressive. To help us write this post, we reached out to several M&A advisors, including M&A advisors who work in:

• The healthcare industry
• The SaaS industry
• The HVAC industry
• The digital marketing industry

Earnout for Healthcare Practices

According to Ryan Mingus at TUSK Practice Sales, earnout agreements are present in almost every healthcare practice sale. This represents a significant shift driven by higher interest rates and tighter lending conditions. When debt is more expensive and harder to secure, buyers naturally push more risk onto sellers through earnout provisions.

Mingus defines earnouts carefully, distinguishing between deals requiring sellers to simply “maintain the business as of time of sale” versus those requiring actual growth. This distinction matters enormously for risk assessment. Maintaining current patient volume and revenue is fundamentally different from being asked to grow the practice while the new owners control staffing, marketing, and operational decisions.

While earnouts appear in most healthcare deals, TUSK advises keeping earnout provisions to 20% or less of total deal value as a general rule. That said, if there’s zero equity roll — meaning you’re not also taking equity in the acquiring entity — you might see higher earnout percentages since you’re not doubling up on risk exposure.

The earnout percentage that makes sense for your practice depends heavily on your risk tolerance and the other options available. When the M&A process is done right, you have more flexibility in which deal you choose. As Mingus told us, “By the end of a properly marketed process, you should be weighing approximately five very meaningful deal terms that are both economic (purchase price, earnout percentage, equity roll) and lifestyle-related (transition obligations, non-compete terms, ongoing involvement). Earnouts are certainly one of those five critical components.”

Earnouts for HVAC Companies

The HVAC industry presents a stark contrast to the healthcare industry. According to Patrick Lange at Business Modification Group, earnouts appear in 5% or less of the deals he represents. The bulk of transactions are all-cash at close with minimal deferred or contingent consideration.

Why such a dramatic difference from healthcare? The answer lies in the business model and risk profile.

HVAC companies built on service, repair, and replacement work — particularly residential service businesses — have predictable, recurring revenue streams that buyers can underwrite confidently. These businesses typically don’t depend on one or two key relationships, and the work is less dependent on specific individuals. Buyers can pay cash upfront because they’re buying an operating business with systems and processes, not the owner’s personal relationships or expertise.

So, when do earnouts appear in HVAC transactions? According to Lange, “The deals that include earnouts are typically those that are project-based or have construction exposure, which is more prevalent in companies doing substantial commercial work. Project-based revenue is inherently less predictable than service contract revenue. Large commercial projects might get delayed, canceled, or become unprofitable due to factors beyond anyone’s control. In these situations, buyers use earnouts to ensure revenue projections materialize before paying the full purchase price.”

BMG’s approach to earnout negotiations reflects the value of competitive processes. They work to get multiple qualified buyers reviewing the business, generating competition and multiple offers — some with earnouts and some without. This optionality gives sellers genuine choice rather than forcing them to accept earnout terms because it’s the only offer on the table.

Earnouts for Digital Marketing Agencies

Earnout agreements are common in digital marketing agency transactions, though their structure and role have evolved over recent years. According to David Tobin of TobinLeff Advisors, most agency deals include some form of deferred or contingent compensation, which can include earnouts.

Typical deal structures involve 50–80% cash at closing, with the remaining portion split between seller financing and/or earnout provisions. Based on TobinLeff’s recent transaction data, agencies with an average EBITDA of $2.4 million saw approximately 59% of the purchase price paid at closing. This means roughly 41% of proceeds were deferred through some combination of seller notes, earnouts, and equity roll.

Earnout duration in digital marketing typically spans three years, although TobinLeff’s current transactions show earnouts ranging from one to five years, depending on agency specifics and buyer requirements.

The choice of performance metrics is particularly contentious in digital marketing deals. Buyers typically prefer EBITDA-based earnouts because they measure true profitability. But owners benefit more from using Adjusted Gross Income (AGI) — which is total revenue minus media buys — because it’s a top-line metric less subject to the new owner’s expense allocation decisions.

As David Tobin explains, “Sellers are rightfully concerned about whether they truly control the P&L statement during the earnout period. If the acquirer decides to allocate more corporate overhead to your agency, hire expensive new team members, or invest heavily in experimental marketing channels, those decisions reduce EBITDA but may be entirely outside your control. An AGI-based earnout protects you from some of those concerns by focusing on revenue generation rather than expense management.”

Why do earnouts appear in digital marketing transactions? Tobin identifies two primary drivers beyond the obvious valuation gap bridging.

1. Buyers worry about what happens post-closing if the agency owners move on to their next venture. Digital marketing agencies often depend heavily on client relationships, creative talent, and the founder’s vision. An earnout keeps founders engaged during the critical transition period when client retention is most vulnerable.
2. Earnouts provide inexpensive financing by using the seller’s own future earnings rather than requiring the buyer to secure additional debt or equity capital. This is particularly appealing to smaller strategic buyers or independent sponsors who may have limited access to capital.

An important trend in digital marketing: for agencies with $2 million or more in EBITDA, earnouts have become less common over the past three to five years. Instead, deal structures increasingly feature a mix of cash at close plus rollover equity. This allows agency founders to maintain some ownership and participate in a “second bite of the apple” when the business is sold again at a higher valuation down the road.

While there’s sometimes a small earnout component in these deals, what TobinLeff sees more frequently is a cash-plus-equity structure that aligns long-term interests without the performance contingencies and potential disputes that earnouts create.

Earnouts for SaaS Companies

Earnout frequency in SaaS transactions depends heavily on company size, growth trajectory, and the acquirer’s profile. According to Aaron Solganick of Solganick & Co., “Earnouts are typically seen with smaller software companies, particularly those without extensive track records or with higher-than-normal customer churn.”

When a smaller SaaS company lacks the multi-year revenue history that allows confident forecasting, or when their customer retention metrics raise concerns about sustainability, buyers may implement a two-year performance earnout. The goal is for the company to maintain or exceed certain performance levels under new ownership before the seller receives full proceeds.

But Solganick shared that buyer type significantly influences earnout likelihood.

“A $100 million software company acquiring a $20 million one might structure a deal with a one, two, or three-year earnout to mitigate integration risk and ensure key employees remain engaged. However, large publicly-traded companies like Microsoft typically won’t include earnouts in their acquisition offers. They have the capital to pay cash upfront and prefer clean transactions without ongoing contingent liabilities.”

When SaaS deals do include earnouts, they’re typically structured as one component of a three-part consideration: cash, equity, and earnout. One example structure might be 70% cash at closing with 30% in performance-based earnout provisions. The earnout duration is usually one to three years, with payouts tied to specific metrics like recurring revenue retention, expansion revenue, or EBITDA targets.

“As your M&A advisor, we’re negotiating the specifics of the earnout structure after we’ve received Letters of Intent (LOIs) from interested buyers. Different buyers will propose different mixes of cash, equity, and earnout based on their risk tolerance and strategic priorities. Our role is understanding your ultimate preference — whether you want all cash, or would accept a mix that includes equity and earnout in exchange for higher total valuation — and negotiating the best available structure within those parameters.”

How M&A Advisors Maximize Your Position on Earnout Agreements (and Your Overall Exit)

Given the complexity and risk inherent in earnout agreements, working with experienced M&A advisors provides significant advantages in negotiating favorable terms.

1. Creating competition among buyers

M&A advisors with recent and relevant experience selling businesses like yours have access to a network of potential buyers. This lets them create a competitive bidding process where multiple buyers are interested in acquiring your company.

When multiple qualified buyers are bidding for your business, you receive multiple term sheets with different earnout structures — some with earnouts, some without. As Patrick Lange described in his approach to HVAC transactions, “Competitive processes generate diverse offers that give sellers genuine choice rather than forcing them to accept earnout terms because it’s the only offer available.”

2. Expert negotiation of earnout provisions

Even when earnouts are part of your chosen deal structure, experienced advisors know which terms are negotiable. They’ve seen hundreds of earnout agreements and know what’s standard versus what’s aggressive. This knowledge is invaluable when buyers propose terms that seem reasonable but are actually outliers that increase your risk.

M&A advisors negotiate to shorten earnout periods, shift from EBITDA to revenue-based metrics when appropriate, add audit rights and dispute resolution provisions, reduce earnout percentage while increasing cash at close, or structure equity roll as an alternative to earnouts.

3. Understanding industry benchmarks

As we saw above, the right M&A advisor will know what’s standard practice in your industry for a business like yours. For example, TUSK Practice Sales’ guidance that earnouts should generally stay at 20% or less of total deal value in healthcare transactions is exactly the type of benchmark that helps you recognize when a buyer is pushing excessive risk onto you.

Without that context, a 35% earnout might seem reasonable simply because you lack comparison points and you think you’re getting a fair deal.

4. Accurate business valuation

When your business is valued correctly upfront based on comparable transactions, market conditions, and your specific financial performance, you enter earnout negotiations from a position of strength. You’re less dependent on earnout provisions to achieve fair total consideration because the base purchase price already reflects appropriate value.

Accurate valuation also helps you evaluate earnout offers objectively. If a buyer offers $8 million with 40% in earnout versus another buyer offering $7.5 million all cash, which is better? That depends on the earnout terms, your risk tolerance, and whether $8 million is actually fair value or inflated specifically to justify the earnout structure. Experienced advisors help you make these comparisons accurately. (Learn more about how to value a business for sale.)

Overall, the best thing an M&A advisor can do is get a high number of interested buyers and then use their transaction experience and professional judgement to help you evaluate earnouts in the offers you receive.

Your advisor has closed dozens of deals and negotiated countless earnout provisions. They know which buyers are sophisticated and fair versus which buyers use earnouts opportunistically. This experience and judgment are invaluable when you’re making decisions that affect your financial future.

Next Steps: Find the Right M&A Advisor for Your Exit

When you’re looking for an M&A advisor, you want to work with one who has:

• Recent and relevant experience in your industry. That is, they’ve sold businesses like yours in the past.
• A proven track record of marketing and closing deals. This means they can verify that they’ve helped other business owners get a good number of interested buyers and have closed deals on their behalf.

At Axial, we connect business owners in the middle market with M&A advisors who have specific experience in your industry and deal size range. Rather than hoping to find the right advisor through referrals or online searches, our process lets you review multiple qualified advisors’ track records, see their recent transactions, and understand their approach to deal structure and earnout negotiations.

We have over 3,000 M&A advisors in our network, along with data on what kind of deals they’ve represented within the Axial network and the kind of results they’ve brought those business owners. For example, we can see how successful an M&A advisor is in creating a competitive bidding process by looking at how many signed NDAs and LOIs they bring to a business.

Once we learn more about your business and your exit goals, we will hand-curate a list of 3-5 M&A advisors that we think are right for you. We will also help you with the interview process, so you’re confident when you choose which M&A advisor to hire.

The best defense against a bad earnout is leverage. Start the process with Axial to quickly compare multiple term sheets and see real-time industry benchmarks on what a fair earnout structure looks like.