Glossary
Earnout
Contingent consideration: an additional amount paid to the seller after completion if agreed conditions are met, most often financial targets for the business over a period of one to three years.
In plain English
An earnout lets a buyer say: "We will pay this much now, and more later if the business performs as you say it will." It bridges the gap between what a buyer is willing to pay today, based on what it can see, and what a seller believes the business is worth, based on what is coming. It is common in agency transactions because so much of an agency's value sits in relationships and future work that are hard to prove in advance.
An earnout is different from deferred consideration. Deferred consideration is a fixed amount paid later. An earnout may never be paid at all, if the conditions are not met.
A hypothetical worked example
Suppose a buyer agrees to pay GBP 3 million on completion for the shares of an agency, plus up to GBP 1 million more if the agency's EBITDA over the following two years reaches agreed targets.
| Component | Amount |
|---|---|
| Cash received at completion | GBP 3,000,000 |
| Earnout, contingent on agreed EBITDA targets (maximum) | GBP 1,000,000 |
| Maximum total consideration | GBP 4,000,000 |
| Minimum total consideration (if no targets are met) | GBP 3,000,000 |
If the targets are met in full, the seller receives GBP 4 million in total. If they are met in part, the earnout may pay a proportion, depending on how it is drafted. If they are not met, the seller receives GBP 3 million. The contingent GBP 1 million depends on agreed conditions and may not be received. A seller comparing this offer with another should ask how comfortable they would be with GBP 3 million as the outcome.
Commercial considerations
- The measure. Revenue, gross profit or EBITDA. Each is defined in the agreement, and the definitions decide the outcome. EBITDA-based earnouts in particular depend on how costs, including group charges, are allocated after completion.
- The targets. Whether they are achievable, whether they step up each year, and whether payment is all-or-nothing or scaled.
- Control. After completion the buyer owns the business. The seller is being measured on something they no longer fully control, so protections about how the business will be run during the earnout period matter.
- Acceleration. What happens if the buyer sells the business, changes strategy, merges it with another or ends the founders' employment during the period.
- Interaction with other terms. Whether the buyer can set off warranty claims against earnout payments, and how disputes about the calculation are resolved.
- Tax. The treatment of earnout payments varies by jurisdiction and structure, and can differ from the treatment of the completion payment. Advice is essential.
Useful questions to ask
- What exactly is being measured, and who prepares the calculation?
- What decisions can the buyer make during the earnout period that would affect the measure, and what protections do I have?
- Is the earnout scaled or all-or-nothing, and what happens if a target is narrowly missed?
- What happens if I leave, am asked to leave, or the business is sold again?
- Can the buyer set claims off against earnout payments?
- How will disputes about the calculation be resolved?
- If none of the earnout is paid, is the completion payment alone an outcome I would accept?
Why it matters to founders and buyers
For founders, an earnout can increase the total value received and reward the growth they believe is coming. It also ties them to the business, and to the buyer's decisions, for the earnout period. For buyers, an earnout reduces the risk of overpaying and keeps founders motivated, but it can create tension if the two sides' interests diverge, for example over investment that reduces short-term profit.
Well-drafted earnouts align interests. Poorly drafted ones are a common source of after completion disputes. The commercial terms deserve as much attention as the headline.
Transaction language and legal treatment depend on the agreement and the jurisdiction. The worked example is hypothetical and is not a benchmark. Written by Motion Advisory Partners as general guidance, not legal advice.