You've spent years building your business, pouring in sweat equity to reach this pivotal moment - the sale.
You're ready to move on to your next venture or retirement. But the buyer wants to make a significant portion of the purchase price an earnout, payable over 2-3 years contingent on performance targets.
Waiting that long to get all your cash feels frustrating after all your hard work.
While earnout provisions can help bridge valuation gaps between buyers and sellers, they also transfer risk to you as the seller by making part of the sale proceeds contingent on future performance under new ownership.
As a seller, you want to minimize the portion subject to an earnout and negotiate seller-friendly earnout terms. Here's how:
Demonstrate forecast credibility
To reduce the perceived risk around the earnout targets, provide evidence that your business can realistically achieve its forecasted performance.
Come prepared with data showing a robust sales pipeline, historical ability to meet projections, stable customer retention, and scalable operations to support future growth. Have the purchase orders and signed contracts with key customers ready to provide a strong defense for your projections.
Having this validation helps give the buyer more confidence in the earnout goals.
Negotiate accelerated payouts
Include provisions that allow for the maximum earnout amount to be paid early if the buyer takes certain actions during the earnout period that could impact the acquired company's ability to meet targets, such as changing leadership, diverting resources, or getting acquired themselves.
This protects you from missing earnout payments due to factors outside your control.
Plan for succession
One buyer concern is continuity of leadership and operations post-close.
Ease this by developing a detailed succession plan for a new management team to take over. Identify key personnel committed to staying through the earnout period and provide training/knowledge transfer plans.
A comprehensive succession strategy demonstrates how the business can maintain momentum under new ownership and meet earnout milestones.
Tie earnouts to revenue, not profits
Never let earnout payments be contingent on bottom-line profit or net income metrics that can be manipulated. Instead, tie earnout goals to top-line revenue performance which is more objectively measurable and harder for the buyer to artificially reduce through expenses or accounting practices post-acquisition.
Ensure audit rights
Insist on robust audit rights to verify the buyer's financial calculations for earnout purposes.
Ideally, this review should be conducted by an independent third-party accounting firm, not just the buyer's internal accountants.
Spell out dispute resolution
Clearly define a process for resolving any disputes over earnout calculations, performance targets or payments.
With careful negotiation, an earnout can bridge valuation gaps while still letting you get maximum upfront value for the business you've built - without having to wait years to receive all your cash.