What Are Earnouts in a Business Sale?

When selling your business, one of the most important — and sometimes complex — elements of deal structure is the earnout.

At Merit Investment Bank, we help business owners understand and negotiate earnouts that align incentives, bridge valuation gaps, and protect their interests.

Understanding Earnouts

An earnout is a contingent payment made to the seller after the sale, based on the company’s future performance. In other words, part of the purchase price is tied to how the business performs after closing — typically measured by metrics such as revenue, EBITDA, or customer retention over a defined period (often one to three years).

Earnouts are particularly common when there’s uncertainty about the company’s future growth or when the buyer and seller have different expectations about value. By tying part of the purchase price to actual results, earnouts can help both sides reach agreement and move the transaction forward.

Why Earnouts Are Used

Earnouts can offer meaningful advantages for both buyers and sellers:

• Bridge valuation gaps when parties have differing views on the company’s potential.
• Reward strong post-closing performance, allowing sellers to share in future upside.
• Reduce buyer risk by linking payment to measurable outcomes.

However, earnouts must be structured thoughtfully to avoid disputes and ensure fairness.

Structuring Earnouts Carefully

While earnouts can create opportunity, they can also introduce complexity. At Merit Investment Bank, we help you negotiate clear, measurable terms that protect your interests — including how performance will be defined, measured, and audited.

We also ensure the agreement anticipates potential changes in management, strategy, or market conditions that could impact your ability to achieve earnout targets.

The Bottom Line

Earnouts can be a valuable tool in achieving a win-win transaction — when designed correctly. With careful structuring and experienced guidance, they can turn uncertainty into opportunity.

Book a free confidential call today!

The Best,

J. Craig Dickens 
Chairman
Craig.Dickens@MeritInvestmentBank.com
253-370-8893

Merit Investment Bank as a leading boutique investment bank is focused on entrepreneurial middle-market companies. Merit Investment Bank Executes sell-side M&A, buy-side M&A, and capital advisory services, debt and equity capital raises, corporate finance, and valuation services. Securities offered through Finalis Securities LLC Member FINRA/SIPC. Merit Investment Bank and Finalis Securities LLC are separate, unaffiliated entities.