An owner says the business sold for four million. What actually completed was two and a half, with the rest depending on profits over three years. That is an earn-out, and it appears in a large share of private company sales.
Why they exist. Sellers price on what the business is about to do; buyers price on what it has done, discounted for the risk that everything depends on the person leaving. An earn-out bridges the gap by making part of the price conditional — and conveniently keeps the outgoing owner engaged through the handover.
How it is measured. Usually revenue, gross profit, EBITDA or specific milestones. Revenue is simple but ignores profitability. EBITDA is closest to real value and by far the most argued about. Milestones — a fixed sum on renewal of a named contract — are the cleanest where they fit. What matters more than the measure is that after completion you no longer control the inputs.
Where they go wrong. Group management charges and enforced supplier changes reduce your profit figure. A buyer investing for growth suppresses short-term EBITDA in perfect good faith. Integration into a larger group can make your numbers impossible to isolate. And an earn-out is an unsecured promise — if the buyer hits trouble, you are simply a creditor.
What to negotiate. Conduct covenants governing how the business is run during the period. Accounting policies fixed in the agreement so the calculation cannot be changed later. Monthly management accounts as of right. An independent expert to settle disputes. A collar and cap — a guaranteed minimum in return for a ceiling. And keep it short: two years beats four, because both forecasting accuracy and your influence decline with time.
Tax. Where the earn-out is a right to an uncertain cash sum, it is generally valued and taxed at completion — so Capital Gains Tax can fall due on money you have not yet received and might never receive. Settle the structure before heads of terms, not after.
The estate planning point. Trading shares may attract Business Property Relief, within the £1 million cap that has applied since April 2026. A contractual right to receive cash from your buyer almost certainly does not. Die mid-earn-out and your estate holds a debt, with your Executors left to argue about EBITDA.
Price the deal on what completes on the day. Treat the rest as upside.