An owner agrees to sell for four million pounds and tells everybody the business sold for four million pounds. What completes on the day is two and a half million. The rest depends on profits over the following three years, calculated in a way that takes four pages of the sale agreement to describe.
That is an earn-out, and some version of it appears in a large proportion of private company sales. It is not a trick. It is a sensible answer to a real problem. But it changes what you are actually agreeing to, and owners who treat the headline figure as the price are often disappointed.
Why earn-outs exist
Buyer and seller almost always value a business differently, and the gap is rarely about arithmetic. The seller prices the business on what it is about to achieve, knowing the pipeline, the new hire and the contract that is nearly signed. The buyer prices it on what it has actually achieved, and applies a discount for the risk that the whole thing depends on the person about to leave.
An earn-out bridges that gap by making part of the price conditional. The seller says the growth is real; the buyer says prove it; both sign. It also serves a second purpose the buyer cares about: it keeps the outgoing owner invested in the handover, which is precisely when businesses tend to wobble.
How the money is measured
Earn-outs are usually tied to revenue, gross profit, EBITDA, or specific milestones such as retaining a key contract.
Revenue is simple to measure and hard to manipulate, but it ignores whether the sales were profitable. EBITDA is closer to real value and is by some distance the most disputed, because it is affected by every cost decision the new owner makes. Gross profit sits between the two. Milestones are cleanest of all where they fit — a fixed sum on renewal of a named contract leaves little to argue about.
The measure matters less than who controls the inputs. After completion, you do not.
Where earn-outs go wrong
Costs you did not choose. The buyer allocates group management charges, moves you onto their more expensive suppliers, or books restructuring costs against your business. Each may be commercially reasonable. Each reduces the profit your payment is calculated on.
Investment that suppresses profit. A buyer who hires a sales team in year one is building long-term value and reducing short-term EBITDA. Both parties can be acting in good faith and the seller still loses.
Loss of control. This is the one owners feel most sharply. You remain financially exposed to a business where you can no longer decide pricing, hiring or investment. Watching someone else make decisions that affect your money, with no vote, is genuinely difficult for people used to running things.
Integration. If your company is merged into a larger group, your figures may become impossible to isolate within a year. If the agreement does not say precisely how they will be identified, you are relying on goodwill.
The buyer’s own troubles. An earn-out is an unsecured promise from a company whose fortunes you no longer influence. If the buyer runs into difficulty, you are a creditor.
Protections worth negotiating
Experienced sellers negotiate the earn-out mechanics as hard as the headline number, because that is where the money actually lives.
Insist on conduct covenants — express obligations on how the business will be run during the earn-out period, covering management charges, related-party pricing, and any restructuring that would distort the measure. Fix the accounting policies in the agreement itself so the calculation cannot be changed by adopting different treatment later. Secure information rights, with monthly management accounts as of right rather than on request. Agree an independent expert to determine disputes, so the alternative to accepting the buyer’s number is not litigation. Consider a collar and cap, guaranteeing a minimum payment in exchange for a ceiling. And keep the period short — two years is usually better than four, because forecasting accuracy collapses with distance and so does your influence.
Think hard about your own role. If you are staying on to deliver the earn-out, your employment terms and the earn-out interact. Being dismissed early should not forfeit payments already earned, and “good leaver” and “bad leaver” definitions repay careful reading.
The tax dimension
Earn-outs complicate Capital Gains Tax. Where the future payment is a right to receive cash of an uncertain amount, that right is generally valued at completion and taxed then — meaning tax can fall due on money not yet received, and possibly never received. The rules differ where the consideration is shares or loan notes, and various elections exist.
This is specialist territory and the structure should be settled before heads of terms are signed, not afterwards. Business Asset Disposal Relief, where available, also needs to be considered against the structure rather than assumed.
And the estate planning point
An earn-out changes the shape of your estate in a way that is easily missed. Trading company shares may attract Business Property Relief — though only within the £1 million cap that has applied since April 2026. A contractual right to receive cash from a buyer almost certainly does not.
If you die during the earn-out period, your estate holds a debt rather than a business, and your Executors inherit the job of arguing about EBITDA with your buyer. Wills should be reviewed before completion rather than after, and the earn-out right should be dealt with explicitly.
The honest summary
Earn-outs are neither good nor bad. They let deals happen that otherwise would not, and for a confident owner selling a growing business they can pay handsomely.
What they are not is a sale price. They are a forecast attached to a legal document, and the value you eventually receive depends on drafting you agreed to under time pressure, months before it mattered. Price the deal on what completes on the day, treat the rest as upside, and spend real money on getting the mechanics right.