Earnouts Explained: How Deferred Payouts Work in a Sale

An earnout is the part of a sale price you don’t collect at closing. You earn it over the next year or two by hitting targets the buyer sets, and if the business falls short, that money never arrives.

Here’s how earnouts work, how they’re structured, and how I’d protect the portion that’s still at risk as your CFO.

What is an earnout in a business sale?

An earnout is a portion of a business’s sale price that the seller receives after closing, and only if the business hits agreed performance targets, usually measured over one to three years. It lets a buyer pay less up front and defer the rest until the results the seller promised show up.

So the total price splits into two parts: the cash at close, which is certain, and the earnout, which is at risk. That split is why an earnout sits at the center of what you’ll keep at close rather than the sticker you shake hands on.

The headline number tells you what the deal looks like; the mix of cash and earnout tells you what you’re likely to bank, and how much of it depends on the buyer.

Why a deal includes an earnout

An earnout usually starts with a gap. The seller believes the business is worth more than the buyer will pay for today, often because the value rests on growth or earnings that haven’t been proven yet, and how a small business is valued turns on those earnings.

Rather than argue over a single number for what your business is worth, the two sides agree the buyer pays a solid amount now and the seller earns the rest by delivering the results they promised.

Earnouts tend to show up in a few situations: a fast-growth story a buyer isn’t ready to pay full price for, an owner-dependent business where the buyer wants the seller to stay and hand over the relationships, and any deal where recent numbers are uncertain or lumpy.

They aren’t only a buyer’s tool, either. A well-structured earnout can pay a seller more than a lower all-cash offer would, so the upside is real when the business performs and the terms are fair.

How an earnout is structured: the five levers

Every earnout comes down to five decisions, and you should have a view on each one before you sign:

• Size: What share of the total price is deferred. In the middle market an earnout is commonly 10% to 25% of the deal, though it can run higher on a risky one (as of 2026, verify).
• Metric: What the payout is measured on, usually revenue, gross profit, or an earnings figure like EBITDA or seller’s discretionary earnings (SDE). Revenue is the seller-friendly choice; bottom-line metrics favor the buyer.
• Threshold: The target that triggers payment, set as a single all-or-nothing hurdle, a tiered scale, or a target with a cap on the maximum.
• Time period: How long the earnout runs. About two-thirds last 1 to 3 years and they rarely stretch past five, so a longer window means longer exposure to the buyer’s decisions.
• Control: How much say you keep over the business during the earnout, from staying on to run it to handing over the keys and hoping the buyer executes.

How big and how long earnouts usually run

An earnout is usually a minority of the price and short-lived, though the numbers differ between general mergers and acquisitions and online-business sales. Earnouts are uncommon in small (sub-$5M) deals, where the drafting cost and the monitoring aren’t worth it, and more common in mid-market and growth-story deals where the buyer wants to share the risk on unproven earnings.

The online figures are worth a closer look, because ecommerce and Amazon FBA sales behave differently from a typical private-company deal. The aggregators that bought up FBA brands leaned on earnouts heavily, which is one reason sellers in this space need to read the terms closely.

Table 1. Typical earnout size and duration (as of 2026; verify before you sign).

Setting	Earnout share of price	Duration	How common
Middle-market M&A	10% to 25%	1 to 3 years	Common in mid-market, rare under $5M
Online / ecommerce sale	About 30% deferred (roughly 70% at close)	3 to 12 months small; up to a few years at $1M+	More common on larger, growth-story deals
Stability-style earnout (online)	10% to 20% of price	Paid after 12 months	Used to de-risk a recent peak

Cliff, tiered, and capped payouts

The threshold decides how forgiving the earnout is. A cliff pays everything or nothing at a single target, a tiered scale pays progressively as the business gets closer to the target, and a cap limits the upside no matter how well the business does. As a seller, you want a tiered structure with no cliff, so a near-miss still pays something rather than wiping out the whole earnout.

Table 2. The same $250,000 earnout under three threshold structures (illustrative).

Result vs target	Cliff (all-or-nothing)	Tiered scale	Capped at target
110% of target	$250,000	$250,000	$250,000
100%	$250,000	$250,000	$250,000
90%	$0	$200,000	$225,000
80%	$0	$150,000	$200,000
Below 70%	$0	$0	$0

Earnout vs a seller note

An earnout is one of a few ways a buyer defers part of the price, and it helps to set it beside the others. A seller note is deferred money the buyer owes you on a fixed schedule with interest, regardless of how the business performs, so it behaves like a loan you made to the buyer.

An earnout is contingent: you collect it only if the business hits its targets, so it can pay in full, in part, or nothing at all.

The rest of the deferred-payment landscape includes the cash at close, which is certain, and any escrow holdback, money parked with a third party to cover problems that surface after the sale.

The practical lesson is that a dollar in a seller note is worth more than a dollar of earnout, because it carries less risk. When you compare offers, weigh the mix of certain and contingent money, not the headline price alone.

A dollar of earnout is worth less than a dollar of cash at close. It’s a bet on a business the buyer now controls, so weigh the mix toward cash and protect the rest.

The risks an earnout puts on the seller

An earnout hands the buyer control of the number you still need to hit, which is where the risk lives:

• Loss of control: After closing the buyer runs the business, so the decisions on pricing, ad spend, and inventory that move your metric are no longer yours to make.
• Metric manipulation: On an earnout tied to EBITDA or profit, a buyer can load costs, allocate overhead, or delay revenue to depress the number your payout depends on.
• Collection risk: The buyer may miss scheduled payments or dispute whether a target was met, and chasing the money later is slow and expensive.
• Tax timing and character: The money is taxed when you receive it, which can land in a higher-rate year, and an earnout tied to your staying on can be recast as ordinary pay rather than sale proceeds.

How to protect your earnout

The terms are negotiable, and a handful of protections do most of the work:

• Pick a top-line metric: Tie the earnout to revenue or gross profit, which the buyer can’t easily manipulate, rather than a bottom-line number they control.
• Get operating covenants and audit rights: Require the buyer to run the business normally during the earnout and give you the books to verify the metric.
• Add acceleration clauses: Make the full earnout come due if the buyer sells the business, breaches the agreement, or removes you before the term ends.
• Weight the deal toward cash at close: The surest protection is a larger certain payment and a smaller earnout, so negotiate the mix, not only the total.
• Keep a role or a say: Staying on with real influence over the metric turns a bet on the buyer into a plan you can affect.

A worked example: a 25% earnout on a $1M sale

Round numbers make the risk clear. Say a Shopify DTC brand sells for $1,000,000, structured as $750,000 cash at close (75%) and a $250,000 earnout (25%). The earnout is tied to trailing twelve months (TTM) revenue holding over two years, on a tiered scale: the full payout at 100% of the target, partial down to 80%, and nothing below 70%.

If revenue holds at target, the seller collects the whole $250,000 and banks the full $1,000,000 over two years. If the buyer switches suppliers and revenue slips to 85% of target, the tiered scale pays about $175,000, so the seller nets roughly $925,000, and the shortfall traces to a decision they no longer controlled.

The $1,000,000 headline and the cash that clears are different numbers, and the gap is the earnout at risk.

Table 3. A $1M sale with a 25% earnout: what the seller nets (illustrative; tiered scale over two years).

Outcome	Earnout paid	Total to seller
Cash at close (certain)	n/a	$750,000
Revenue holds at target (100%)	$250,000	$1,000,000
Revenue at 85% of target	About $175,000	About $925,000
Revenue below 70%	$0	$750,000

How earnouts are taxed

The general rule is that earnout money is taxed when you receive it, not at closing, which can spread the tax across the payout years (installment-sale treatment may apply). There’s a trap worth knowing: an earnout that’s conditioned on you staying employed can be treated as ordinary compensation income rather than capital gain, which is taxed at a higher rate.

How your earnout is taxed turns on the specific structure, so model it with a tax professional before you sign. Treatment is current as of 2026.

Frequently asked questions