Of every structure I cover in Creative Acquisitions, the earn-out generates the most excitement and the most disappointment. Buyers love it because it looks like a way to bridge a valuation gap without writing a bigger check. Sellers love it because it looks like a way to get closer to their asking price. Then eighteen months later, half of these arrangements end in a dispute, a lawsuit, or a check that never gets written. The structure is not the problem. How people build it is.

Why Earn-Outs Exist in the First Place

An earn-out lets a buyer and seller disagree about value and still close the deal. The seller thinks the business is worth $4 million. The buyer thinks $3 million is closer to right, especially given how concentrated the customer base is. Instead of one side capitulating, they agree on $3 million at closing plus up to $1 million more if the business hits specific performance targets over the next two or three years. On paper, it is an elegant solution. Both sides get to be right.

The trouble starts the moment the deal closes and control changes hands, because the person whose payout depends on future performance is no longer the person running the business.

The Structural Problem Nobody Discusses at the Negotiating Table

Once you own the business, you make the decisions. You decide how much to invest in marketing, whether to keep a struggling product line, whether to fold the acquired company into your existing operations or run it standalone, and how expenses get allocated. Every one of those decisions can move the number the earn-out is measured against, and you are the one making them.

This is not usually malicious. A buyer integrating the acquisition into a larger operation will naturally reallocate costs, cross-sell into the existing customer base, and change reporting structures, because that is what a good operator does after an acquisition. But every one of those normal, sensible moves can suppress the standalone metric the earn-out was written against. The seller, meanwhile, has no operational control and can only watch the number come in lower than expected. That gap between intention and outcome is where nearly every earn-out dispute originates.

The Metric Is Where Deals Go Wrong

The single highest-leverage decision in any earn-out is what you measure. Revenue is the most common choice because it is the easiest number to agree on, and it is also the worst choice in most cases, because revenue can be grown in ways that destroy value: heavy discounting, unsustainable customer acquisition spend, channel stuffing near the measurement date. A seller chasing a revenue target has every incentive to do things that make the business worse in the long run, right when the buyer needs it to be run well.

EBITDA is closer to the right idea but introduces its own fight, because EBITDA is sensitive to exactly the allocation and integration decisions the buyer now controls. If you go this route, the earn-out agreement needs to specify, in detail, how shared costs get allocated, what happens if the business is integrated into a larger unit, and who has approval rights over spending that affects the metric. Vague language here is not a minor drafting issue. It is the single biggest cause of earn-outs that end in litigation.

The metrics that actually hold up under real-world operating decisions tend to be narrower and more mechanical: gross profit on a specific product line, retention of a named list of key accounts, unit volume in a specific channel. They are less flexible, which is exactly why they are harder to argue about later.

Give the Seller Some Control, Or Do Not Use an Earn-Out

If you want an earn-out to actually work, the seller needs some real influence over the outcome during the earn-out period. That might mean the seller stays on as an operator with defined authority over the specific area the earn-out measures. It might mean the buyer agrees contractually not to make certain changes, like altering pricing on the seller's core accounts or reassigning the seller's sales team, without consent. Whatever form it takes, the principle is the same: do not tie someone's payout to a number they have no ability to influence. That arrangement looks fair on the term sheet and turns adversarial in practice, because you have created a situation where the buyer's normal operating decisions and the seller's financial interest are directly opposed.

If you cannot give the seller meaningful influence, the honest answer is that an earn-out is the wrong tool for this deal, and you are better off negotiating the price directly or using a different creative structure. I cover several alternatives in the book, including seller notes with performance-based interest adjustments, which accomplish some of the same risk-sharing without putting two parties in an ongoing fight over operating decisions.

Write the Dispute Resolution Process Before You Need It

Every earn-out agreement should specify, in advance, exactly how the metric gets calculated, who calculates it, what records the seller has the right to review, and what happens if the two sides disagree on the number. If this process is not written down before closing, you are negotiating it for the first time in the middle of a dispute, with real money and a damaged relationship on the table. A short, specific dispute resolution clause, agreed to when both sides are still cooperative, prevents most of the fights I have seen play out over the years.

The Bottom Line

Earn-outs are not a flaw in creative deal structuring. They are one of the most useful tools available when a buyer and seller genuinely disagree about value and both want the deal to close. But they only work when the metric is specific, the seller retains real influence over the outcome, and the calculation and dispute process are written down in detail before anyone signs. Skip any of those three, and you have not structured a bridge between two valuations. You have scheduled a disagreement for eighteen months from now.

The full framework for structuring earn-outs, seller notes, and the other tools that make creative deals close is in Creative Acquisitions, available on Barnes & Noble. More on acquisitions, real estate, sales, and operations at drconnorrobertson.com.

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