Earn-outs can be viewed with scepticism by founders, but structured properly, they can bridge a genuine valuation gap and give a founder real upside for the growth they help deliver after closing. The question is not whether earn-outs are good or bad, but whether they are solving an honest disagreement on value or simply pushing risk back onto the seller.
That distinction is the focus of this webinar, part of Venero's Complete Tech M&A Playbook. Elie Youssef and Georgios Markakis walk through when earn-outs make sense, how to structure the economics properly, what changes once the buyer takes control, and the protections that determine whether future value is actually collectible.
Not all deferred consideration is the same
Before getting into earn-outs specifically, it's worth separating three things that often get bundled together in conversation: cash at closing, fixed deferred consideration, and earn-outs. Cash at closing is the simplest, since the deal completes and the money is paid with the highest possible certainty.
Fixed deferred consideration is a known amount paid later, so the main risks are timing, the buyer's creditworthiness, and whether anything can be set off against the payment. An earn-out is different again, because the amount itself still has to be earned. Five million dollars payable in twelve months regardless of performance is not the same as five million payable only if ARR hits a specific target, even though both might appear on the same future date on a term sheet.
When an earn-out is a bridge, and when it's risk transfer
Earn-outs make the most sense when there is a genuine gap between what a seller believes the business is worth and what a buyer is prepared to pay today. If a seller sees 85 million in value while a buyer is comfortable with 70 million now, and that gap is tied to something measurable over the next 12 to 24 months, an earn-out can be a sensible way to close it.
As a general guide, somewhere between 70% and 85% of headline consideration should be secured through cash at closing or fixed deferred payments, with only the remaining 15%$ to 30% sitting in the earn-out. The warning signs appear when the earn-out becomes the core of the deal rather than genuine upside: vague or unrealistic targets, loss of operational control, buyer-controlled measurement, or heavy integration risk that erases the metric being tracked altogether. Earn-outs should never be the starting position in a negotiation. They should be introduced only when they genuinely help close a valuation gap.
The same headline number can mean very different outcomes
Two offers can carry an identical headline price and still deliver very different results depending purely on how the earn-out is structured. In one illustrative example, two offers each proposed 85 million total consideration, with 60 million at closing, 5 million deferred, and a maximum 20 million earn-out.
The difference was in the mechanics. One offer used a cumulative two-year revenue test with a catch-up mechanism. The other used annual targets with a hard cliff and no catch-up. Under identical business performance, the cumulative structure paid out the full 20 million, while the cliff structure caused the seller to permanently lose a 10 million tranche simply because year one missed its target, even though year two more than made up for it. Same company, same performance, ten million dollar difference, purely down to wording.
Choosing a metric that can't easily move
Once an earn-out is accepted in principle, the choice of metric matters enormously. Revenue or ARR tends to be easier for sellers to track and verify, though even that requires clear definitions around attribution, churn, and currency treatment.
The further down the profit and loss statement the metric sits, the more discretion shifts to the buyer. EBITDA is the clearest example: a business can hit its revenue plan exactly, but if the buyer adds headcount, increases product investment, or reallocates central costs, the EBITDA figure can move substantially without any change in underlying performance. That doesn't automatically make an EBITDA-based earn-out a bad idea, but it does mean the rules around costs and allocations need to be defined far more tightly.
It's also worth thinking through scenarios in advance. What happens if the buyer bundles the acquired product with its own? How is revenue attributed if the buyer gives the product away to support a core offering elsewhere? These questions matter because earn-outs typically run over one to two years, and a lot can change in that time.
Avoid the all-or-nothing cliff
The shape of the payout curve can matter as much as the target itself. A hard cliff creates disproportionate outcomes: missing a 10 million revenue target by just 1% could mean losing an entire tranche rather than a small, proportional shortfall.
A better structure typically includes a floor below which no payment is due, a pro-rata or tiered range as performance improves, and a cap for exceptional upside. The goal isn't to make the target easy to hit. It's to make the economics proportionate, so a small miss doesn't wipe out a large amount of value.
Control shifts the moment the deal closes
This is where founders are often caught off guard. After closing, the buyer owns the business, and even a founder who remains CEO may lose meaningful control over decisions that directly affect the earn-out. Pricing, sales headcount, marketing investment, integration timing, and cost allocation can all move outside the seller's influence.
A common example involves an earn-out built around a hiring plan for additional sales staff. If the buyer freezes recruitment across the wider group six months after closing, the founder still has the same revenue target, but one of the key assumptions behind it has disappeared. This usually isn't bad faith. The buyer is simply running the business according to its own broader priorities. It does mean, however, that the earn-out needs to be structured with that possibility built in from the start.
Measurement disputes can also arise even when nothing about the underlying business changes. In one illustrative case, both sides agreed on 15.6 million of reported revenue, but the buyer excluded certain bundled and cross-sell revenue, adjusted for credits and refunds, and applied a different foreign exchange treatment, bringing its own calculation down to 14.7 million. One side hit the target; the other missed it, despite identical commercial performance. That is why the definitions behind a metric matter just as much as the metric itself, and why they need to be locked down before signing rather than argued over afterward.
The protections that make future value bankable
Once the economics are agreed, a handful of contractual protections determine whether that future value is actually secure. If a founder is removed without cause during the earn-out period, the consideration should not simply disappear along with their job, which is why separating the earn-out from continued employment matters.
If the buyer sells or restructures the business during the measurement period, the agreement should specify whether the earn-out accelerates or transfers to the new owner. And on payment risk, set-off limits can prevent unrelated claims from being used to withhold money, while a parent guarantee or escrow can add protection where the buyer's own creditworthiness is a concern. These clauses can sound like pure legal detail, but economically, they decide how real that future value actually is.
The founder test before signing
The webinar closed with a simple checklist founders should be able to answer before accepting any deferred or contingent consideration:
- Would I still do this deal if the earn-out paid zero?
- Is the metric objective, and is it something I can reasonably influence?
- Will I have access to the information needed to verify the payout?
- What happens if the buyer integrates the business, changes the budget, removes me, or sells the company?
- If part of the price is fixed but deferred, what protects me if the buyer simply doesn't pay?
If the answer to the first question is no, that's usually a sign too much of the deal's value is sitting in contingent consideration rather than something certain.
Final thought
An earn-out isn't inherently a red flag, and it isn't automatically a gift either. It's a tool for bridging a genuine disconnect on value, and like any tool, its usefulness depends entirely on how carefully it's built. The goal was never to negotiate the largest possible headline earn-out. It's to maximise the real probability of actually collecting it.
As you consider your exit options, keep in mind one thing: the best outcomes in M&A are never accidental. They come from founders who prepare early, understand what buyers are really evaluating, and treat every stage of the process, from valuation through to the final earn-out clause, with the same discipline that built the business in the first place.
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