Earn-out

Definition

An earn-out is a form of deferred consideration where a portion of the purchase price is contingent on the acquired business achieving agreed performance targets — profit, revenue or retention — over a defined period after completion.

In plain terms

Part of the seller's payout is 'earned' only if the business performs. It bridges a gap in what buyer and seller think it's worth, and keeps the seller invested in a smooth handover.

Why it matters for your company

For a buyer, an earn-out reduces upfront funding and shares risk. Factor the potential payments into your funding plan. See funding a business acquisition.

In practice

Picture a director selling their limited company to a trade buyer who isn't willing to price the whole business on today's numbers. Rather than walk away, the buyer offers a lower amount upfront plus an earn-out, payable if the business hits agreed milestones once the seller's team has handed over. The seller typically stays on, at least informally, to help deliver those targets, which changes the tenor of a deal that would otherwise end cleanly on completion.

In this situation the earn-out period becomes a live commercial relationship, not just a legal clause. The former owner may have limited control over decisions that affect the metric being measured — pricing, staffing, which contracts get prioritised — once the buyer's management takes over. Clear, written definitions of how the target is measured and reported, and who controls the levers that affect it, matter more than the headline structure of the deal.

How lenders read it

When an earn-out sits within an acquisition structure, a lender assessing the deal will typically look at how much of the sale price is deferred versus paid on completion, since that shapes the funding gap the buyer actually needs to bridge now. A business acquisition loan is usually sized against the upfront consideration and integration costs, with the earn-out treated as a separate future obligation for the buyer's company rather than something the lender is being asked to fund today.

Lenders and advisers will also want to understand whether the earn-out could create disputes that distract the acquired business during the period that matters for loan servicing. A clearly documented earn-out mechanism, agreed alongside the deferred consideration terms before completion, tends to be viewed more favourably than one left loosely defined, because ambiguity here has a habit of resurfacing as a commercial argument at exactly the point the business needs to be settling into new ownership.