Remember the days when selling your business meant you’d get a small pile of cash now, and the rest if you hit some magical future target? Welcome to the era of clean exits.
What Is an Earnout, Anyway?
In simple terms, an earnout is a contractual promise that ties a portion of your sale price to the business’s future performance. Think of it as a conditional bonus on your own exit: you get some cash at closing, but the rest is locked away until you hit specific targets. Usually revenue or profit goals over a set period.
What’s Wrong with Earnouts?
Earnouts are often designed to bridge the gap between a seller who sees big upside, and a buyer who’s more conservative. But as some founders find out the hard way, it often leaves your final payout dependent on results you no longer fully control.
Earnouts can breed tension because:
- Founders want to hit targets and get paid out.
- Buyers want to invest in future growth.
- Buyers and sellers' goals become misaligned if the numbers don’t add up.
A Better Way to Sell Your Business
As earnouts can be quite destructive for a new partnership, it’s often better to have an aligned plan outside of the transaction. Buyers (especially private equity) want aligned, empowered management teams, clear plans, and mutual incentives for long-term success. Not a mess of earnout clauses that cause headaches all round.
What an aligned business sale plan looks like:
- Negotiate a fair value up front.
- Agree on real, achievable growth plans.
- Build in broader, more flexible incentives if you want to keep skin in the game (for example, rolling over equity or staying on in a leadership role).
The Lesson for Founders Selling a Business
Don’t listen to potential buyers who say “it’s always been done this way” or advisors who want to take a cookie cutter approach to your deal. The best deals are built on trust, transparency, and alignment, not a matrix of carrot-and-stick clauses.
If the buyer insists on an earnout, make sure every clause is clear, fair, and truly achievable. If it’s not, fight for a simpler structure and focus on building value together.
Ready to Chat About Your Next Move?
If you’re even thinking about selling your business (next week or five years from now), BlueRock’s transaction advisory team is here to help. No pressure, no jargon. Fill in the form below and we’ll be in touch for a confidential, straight-shooting chat about your options.
