What is an earn-out when you sell or buy a business

Has a buyer told you they love your business, but want to pay part of the price later, if it performs?

That's an earn-out. An earn-out is the part of the purchase price paid after settlement, and only if the business hits agreed targets, usually revenue or profit, over a set period. It turns some of your sale price into a promise.

The uncomfortable part isn't the delay. It's that you'll be judged on targets in a business you no longer control. The buyer sets the budget, hires the staff and decides where the money goes. You get the scorecard.

Earn-outs are common, and getting more so. SRS Acquiom's 2026 deal terms data found earn-outs in twenty-four percent of private-target deals outside life sciences in 2025, up from seventeen percent across 2014 to 2022.

What is an earn-out, and how does it work?

A buyer and a seller rarely agree on what the future is worth. The seller prices in next year's growth. The buyer prices in last year's results. An earn-out bridges the gap by paying for the growth only once it turns up.

A typical structure looks like this. A fixed amount at settlement. Then one or more further payments over an agreed period after settlement, each tied to a target. Hit it and you're paid. Miss it and you're paid less, or nothing.

The trouble is what happens to the money in practice. Across deals closed through 2025 outside life sciences, the same SRS Acquiom data shows that fifty-nine percent paid something on the earn-out, but only about twenty-one percent of the maximum possible earn-out money had been paid to date.

Read that slowly. Most sellers get something. Very few get all of it.

That isn't always bad faith. Markets turn, integrations run late, and targets set in a confident negotiation look different a year later. But the reason doesn't change the result. The money you were counting on didn't arrive.

How to negotiate an earn-out you'll actually get paid

The fix is simple to say and hard to do. Negotiate the earn-out as if you'll never see it. Then write it so you will.

That means two things. First, push for as much of the price as possible at settlement, and treat the earn-out as upside, not as the deal. Second, define every term so tightly that there is nothing left to argue about.

These are the terms that decide whether the money arrives.

Term	What to pin down
The metric	Revenue is harder for a buyer to move than profit. If it's profit, define which costs count, especially head-office charges.
The period	Shorter is safer. Every extra year is another year of decisions you don't make.
The shape	All-or-nothing targets punish a near miss. A sliding scale pays for partial performance.
The buyer's obligations	What the buyer must do to support the business, written as specific actions, not good intentions.
The accounting	Which accounting policies apply, and that they match the ones used to set the targets.
Change of control	What happens if the buyer sells, merges or shuts down your business before the period ends.
Disputes	Who checks the numbers, how fast, and an independent expert if you disagree.

The honest objection is that a buyer won't accept every protection. Tie their hands too tightly and the earn-out is worth less to them, so they'll offer less for it. You're trading certainty against price, and you should know which one you're buying.

A good earn-out pays for performance. A bad one pays for patience.

Buying a business with an earn-out

If you're on the other side of the table, an earn-out is one of the best tools you have. It lets you pay a fair price for growth you can't yet verify, and it keeps the seller interested through the handover.

It works best when the earnings depend heavily on the owner. If the customers follow the founder, an earn-out makes the founder help you keep them. I've written about why founder dependency is a valuation discount; an earn-out is one way a buyer prices that risk.

But a buyer who uses an earn-out to pay less, while planning to change everything, is buying a lawsuit. Agree targets you genuinely expect the business to hit under your ownership.

How the ATO treats an earn-out

In Australia, the tax treatment matters as much as the headline price. The ATO's look-through earnout rules can apply when, among other conditions, the right was created on or after 24 April 2015, the payments depend on the business's economic performance, the parties deal at arm's length, and all payments are made within five years after the end of the income year of the sale.

When those rules apply, the earn-out payments adjust the seller's capital proceeds and the buyer's cost base as they're paid, rather than the earn-out being valued as a separate asset up front. That can mean amending an earlier year's return when a payment arrives. The ATO also notes that future earn-out payments can affect eligibility for the small business CGT concessions.

Talk to your accountant before you agree the structure, not after. The way an earn-out is drafted can change the tax you pay.

Where earn-outs go wrong after settlement

Most earn-out disputes don't start with a bad buyer. They start with a vague sentence.

The buyer moves your best salesperson into another division. Head office starts charging your business for shared services. A product line is folded into the buyer's own brand, and its revenue disappears from your numbers. Each decision makes sense for the buyer. Each one moves your target further away.

If the contract only says the buyer must use reasonable efforts, you'll end up arguing about what that means, usually through lawyers and sometimes for years. If it lists the specific things the buyer must do, and must not do, there's far less to argue about.

The same goes for promises made in the room. A buyer who says they'll keep the team together and back the growth plan may mean every word. Unless it's written into the contract, it's goodwill, not protection.

The contract protects you. The goodwill doesn't.

Why I am recommending it

I recommend earn-outs, carefully, because they get deals done that otherwise wouldn't happen. I also recommend reading every word of one twice.

Chairing the board of an ASX-listed company taught me that a condition nobody defines gets defined later, by whoever holds the cheque book. In an earn-out, after settlement, that's the buyer.

So my rule is simple. Take the upfront price you could live with if the earn-out paid nothing. Treat everything above it as a bonus you've negotiated hard for. If you also want to understand why the buyer's number looks the way it does, read the multiple is the buyer's verdict, not yours.

Do this before Friday

If a buyer has floated an earn-out, write the target down in one sentence: the metric, the number, the period and who measures it. Send that sentence to your accountant.

If you can't write it in one sentence, it isn't ready to sign.

If you're selling or buying and an earn-out is on the table, book a free face-to-face consultation with me (JZ) through the booking form. You can also read how I work on Exit: selling your business and Reinvest: buying your next business.