A seller signs at nine figures and walks out of closing believing the deal is done. Two years later, half of that number never arrives. The earnout missed, the working capital true-up went the wrong way, and the escrow got clawed.
The headline price was real, but only a fraction of it ever cleared the wire.
This is the version of M&A that founders keep learning the hard way. Deal structure, not the top-line number, decides who actually wins the sale. And the mechanism doing the most damage right now is the earnout.
The Headline Number Is Not the Deal
An earnout is the piece of the price a buyer promises to pay later, only if the business hits agreed targets after close. Revenue, EBITDA, product milestones, customer retention, sometimes all four stacked together. On paper it looks like a bridge between what the seller thinks the company is worth and what the buyer is willing to underwrite today.
In practice, the contingent piece is not small. A legal briefing on lower middle-market deals notes that earnouts commonly represent 15 to 30 percent of purchase price, and in some deals climb as high as half. When a third of your consideration is conditional, the negotiation over how those conditions read matters as much as the multiple.
Sellers still tend to focus on the multiple. Buyers know it. That asymmetry is where the sale is often won or lost.
Why 'Just Hit the Numbers' Fails as a Plan
The intuitive seller strategy is simple: sign the deal, stay on for the earnout period, run the business hard, collect. It rarely works cleanly, and understanding why is the difference between a real payout and a paper one.
The moment you close, you are no longer the one deciding what the business does. The buyer sets the budget, controls hiring, chooses which customers to prioritize, and often reroutes sales through their own channels. Any of those choices can move the metric your earnout is measured against.
Some of them will be reasonable business decisions, and some will cost you the payment while looking exactly the same from the outside.
This is why the mismatch between strategic and financial acquirers matters so much at signing, not after. Their operating instincts, integration timelines, and reporting standards differ, and the real difference between strategic and financial buyers shows up most sharply in the year after close, exactly when the earnout is being measured.
Litigation is the other reason 'just perform' is a weak plan. Earnout disputes are one of the busier corners of deal litigation, and the courts have been getting more specific about what buyers can and cannot do. A recent Harvard Law analysis of Delaware Supreme Court guidance walks through how efforts clauses and the implied covenant of good faith actually get applied, and the takeaway for sellers is unflattering: if the contract does not require the buyer to do something, a court is unlikely to write that requirement in for you later.
Structure the Earnout Like You Expect to Litigate It
The sellers who actually collect treat the earnout section of the agreement as the deal, not an appendix. That means fighting for specific language during drafting instead of relying on goodwill after close.
- Pick a metric the buyer cannot redefine on the fly. Revenue is harder to manipulate than EBITDA. If EBITDA has to be the measure, lock the accounting policies to the ones used pre-close and list the add-backs by name.
- Write real operating covenants. 'Commercially reasonable efforts' is not a plan. Spell out the sales headcount, the marketing spend floor, the product roadmap items, and the customers that must be actively supported during the measurement period.
- Restrict the moves that kill payouts. Bar the buyer from redirecting the acquired company's pipeline to affiliates, reassigning key salespeople, or discontinuing the products the earnout depends on, without your consent or an agreed makewhole.
- Fix the dispute mechanism up front. Name the independent accountant, cap the review timeline, and require the buyer to share underlying financial data on a set cadence. Litigation is expensive; a defined referee is cheap.
- Shorten the tail. A one or two-year earnout with a higher hurdle usually beats a three or four-year earnout with softer targets. Time is the buyer's ally, not yours.
Trade Contingent Dollars for Certain Ones
The other move worth making is the one sellers hesitate on: give up some of the theoretical maximum in exchange for cash at close. A dollar of earnout is not a dollar. It is a probability-weighted claim on a number that someone else controls, discounted by the odds of a dispute, and discounted again by the years you will wait.
Run the math with that lens and the trade often looks obvious. Accepting a lower headline number with more of it locked in at close beats chasing a bigger figure that pays out at a fraction of its face value. Ask the buyer for a rollover equity stake, seller financing with real security, or a larger cash component in exchange for compressing the earnout. Most buyers would rather negotiate the mix than lose the deal.
The founders who win the sale stop treating structure as boilerplate and start treating it as the trade itself. The number on the term sheet is a story. The certainty of the cash is the ending.
