Earnouts in a Business Sale: How to Structure & Review
An earnout bridges a price gap by paying the seller later if the business hits targets — and it is one of the most litigated terms in M&A.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not legal advice.
Overview
An earnout pays the seller additional consideration after closing if the business hits agreed targets (revenue, EBITDA, milestones). It bridges a valuation gap, but it ties the seller’s payout to a business the buyer now controls.
Earnouts are a frequent source of disputes, so the metric, the measurement, the post-closing covenants, and the dispute process all matter.
Topics to check
Revenue-based earnouts are simpler but easier to hit with low-margin sales; EBITDA-based earnouts better reflect profit but are easier to manipulate through allocations and overhead. Define the metric, the accounting method, and any add-backs precisely.
Specify how the metric is calculated and reported, and give the seller audit/inspection rights over the calculation.
Because the buyer runs the business during the earnout period, the seller should negotiate covenants: operate consistent with past practice, do not divert sales to affiliates, maintain the product line and sales force, and do not take actions designed to reduce the earnout.
A buyer wants flexibility to run the business; the tension between buyer flexibility and seller protection is the heart of most earnout fights.
Address what happens if the buyer is sold during the earnout period (acceleration or deemed achievement), and how disputes over the calculation are resolved — ideally by a neutral accounting expert with a defined scope, not one party’s own accountant.
A clause giving the buyer or seller sole discretion over the earnout calculation is a red flag for the other side.
Key takeaways
- Define the metric, accounting method, and add-backs precisely.
- Revenue earnouts are simpler; EBITDA earnouts are more manipulable.
- The seller needs covenants on how the buyer runs the business post-closing.
- Address acceleration on a change of control during the earnout period.
- Resolve disputes via a neutral expert, not one party’s accountant.
Official resources
Legal-review notes
Guide confidence marker: Medium confidence.
- Earnout enforceability and implied-covenant claims vary by state and on the exact drafting.
- Have counsel and accountants confirm the metric, covenants, and dispute mechanics.
Frequently asked questions
What is an earnout?
Additional purchase price paid to the seller after closing if the business achieves agreed targets, such as revenue or EBITDA over a measurement period. It bridges disagreements about the company’s value.
Why are earnouts so often disputed?
Because the seller’s payout depends on a business the buyer now controls. Without clear metrics, accounting rules, and covenants on how the buyer operates the business, the parties often disagree on whether the targets were met.
How can a seller protect an earnout?
By negotiating a precise metric and accounting method, covenants requiring the buyer to operate the business consistent with past practice and not to undermine the earnout, audit rights, acceleration on a sale, and a neutral dispute process.