Khaled Azar 
Earnouts appear in roughly one out of every five private M&A transactions outside of life sciences. In 2024, the median earnout equaled 31% of closing payments, according to the SRS Acquiom 2025 Deal Terms Study. That means nearly a third of what a seller expects to collect depends on what happens after the wire transfer clears.
I have seen earnouts save deals that would otherwise collapse over a valuation gap. I have also seen them destroy relationships, trigger litigation, and leave founders with nothing. The difference almost always comes down to structure.
The Deal That Almost Died Over 15%
A valuation gap that seemed impossible to bridge, solved with a two-tier revenue target.
We represented a SaaS founder selling a $6M ARR business. The buyer’s offer came in at 4.5x. The seller wanted 5.5x. That gap, roughly $6M, was a dealbreaker.
Instead of walking away, we structured a two-tier earnout. The first tier paid an additional 0.5x if the business hit $7M ARR within 12 months. The second tier paid another 0.5x if it reached $8.2M by month 24. Both targets were achievable given the company’s 18% YoY growth rate.
The founder hit the first tier in month 10 and missed the second by $200K. Total payout: 5.0x. Not the full 5.5x he wanted, but far better than the 4.5x that was on the table. The buyer got downside protection. The seller got a price he could live with.
Only 22% rely on EBITDA. Revenue is harder for buyers to manipulate post-close, which is why sellers increasingly demand it (SRS Acquiom, 2025).
Earnouts work best when they bridge a specific, quantifiable valuation gap with targets both sides believe are realistic.
Choosing the Right Metric
The metric you choose determines who holds the power after closing.
This is where most earnout negotiations go wrong. The metric is not just a formula. It is a lever of control. Revenue favors the seller because it is harder to manipulate. EBITDA favors the buyer because they control expenses post-close. Gross profit sits in the middle.
Here is how the most common earnout metrics compare in practice:
| Metric | Seller Risk | Buyer Risk | Best For | Watch Out For |
|---|---|---|---|---|
| Revenue | Low | Higher | Growth-stage companies | Buyer may slow sales investment |
| EBITDA | High | Low | Mature, profitable businesses | Buyer controls cost allocation |
| Gross Profit | Medium | Medium | Businesses with variable COGS | Definition disputes on what counts as COGS |
| Customer Retention | Medium | Low | Subscription/SaaS businesses | Buyer’s product changes can increase churn |
| Milestones | Variable | Variable | Product launches, regulatory approvals | Binary outcome, no partial credit |
In our practice, we push for revenue-based earnouts on the sell side whenever possible. If the buyer insists on EBITDA, we negotiate explicit protections: minimum operating budgets, restrictions on cost reallocation, and independent accounting review rights.
Revenue-based earnouts protect sellers. If you accept an EBITDA metric, insist on contractual guardrails that prevent the buyer from manipulating expenses to reduce your payout.
Six Negotiation Levers That Matter
The metric gets the attention, but these six terms determine whether you actually get paid.
- Duration: The median earnout period is 24 months. Shorter is better for sellers. Anything beyond 36 months introduces too many variables outside your control.
- Measurement periods: Annual targets are rigid. Cumulative targets give you more runway. We always push for cumulative when representing sellers.
- Acceleration clauses: If the buyer sells the company during the earnout period, the full remaining earnout should become payable immediately. Without this, acquirers can flip your business and zero out your earnout.
- Operating covenants: The buyer should commit to maintaining headcount, marketing spend, and product investment at pre-close levels. Vague “commercially reasonable efforts” language is not enough. Delaware courts have struggled to enforce these vague standards.
- Dispute resolution: Specify an independent accounting firm to resolve disagreements. Do not leave this to litigation. Name the firm in the purchase agreement.
- Partial payments: Avoid all-or-nothing thresholds. A tiered structure where you earn proportional payments for proportional achievement protects against near-misses.
The SRS Acquiom 2025 study found that earnout use peaked at 30-37% of deals in 2023, then settled to 22% in 2024. The drop suggests buyers and sellers are getting more selective about when earnouts make sense, which is a healthy sign for deal quality.
When to Walk Away From an Earnout
Not every deal should include one. Earnouts add complexity, create post-close friction, and can take years to resolve. Here are the situations where we advise clients to avoid them entirely:
- The gap is too large. If the earnout represents more than 40% of total consideration, the risk profile changes. You are no longer bridging a gap. You are gambling on future performance under someone else’s control.
- The buyer will not agree to operating covenants. Without enforceable commitments to maintain the business, an earnout is an empty promise.
- You are leaving the business. If you will not be involved post-close, you have no ability to influence whether targets are met. Earnouts work best when the seller retains operational involvement.
- The metric is EBITDA with no protections. A buyer who insists on an EBITDA metric but refuses expense guardrails is telling you everything you need to know about their intentions.
A clean deal at a fair price beats a bloated headline number that depends on an earnout you may never collect.
Frequently Asked Questions
What percentage of M&A deals include earnouts?
Approximately 22% of private M&A deals outside life sciences included earnouts in 2024, according to the SRS Acquiom 2025 Deal Terms Study. In life sciences, the figure exceeds 80% due to regulatory and clinical trial uncertainties.
How long do earnout periods typically last?
The median earnout period is 24 months for transactions outside life sciences. Life sciences deals often run 3-5 years or longer. Shorter periods (12-18 months) reduce risk for sellers but may not capture enough performance data for buyers.
What is the best earnout metric for sellers?
Revenue is the safest metric for sellers because it is harder for buyers to manipulate post-close. In 2024, 62% of earnouts used revenue as the primary metric, while only 22% used EBITDA. If you must accept EBITDA, negotiate minimum operating budget commitments and independent audit rights.
Can earnouts lead to lawsuits?
Yes. Delaware courts have seen increasing earnout litigation as deals from 2021-2023 reach their calculation periods. Common disputes involve whether the buyer operated the business in good faith and how metrics were calculated. Specifying an independent accounting firm for dispute resolution in the purchase agreement reduces litigation risk significantly.
Next Steps
Structure matters more than price when deferred consideration is on the table.
If you are negotiating a deal with an earnout component, or want to understand how deal structure affects your total payout, we will walk you through the levers that matter. Read how earn-outs can bite you later, then book a call.