An earn-out is a mechanism in a business sale where part of the purchase price is deferred and paid to the seller only if the business achieves agreed performance targets after completion, such as revenue or profit thresholds, typically measured over one to three years.
How an earn-out works
Under an earn-out, the buyer pays an initial amount at completion, with further consideration payable later if the business hits KPIs such as revenue, EBITDA or customer retention targets defined in the Sale and Purchase Agreement. Calculating the payout depends on clean, consistent post-completion financial reporting, since disputes commonly arise over accounting treatment or over how the business was run during the earn-out period, particularly if the buyer changes strategy or investment levels in a way that affects the seller's ability to hit their targets.
How UK businesses use earn-outs
- A business owner selling their company agrees an earn-out structure so part of the sale price is paid over the following two years if the business hits agreed revenue targets.
- A buyer uses an earn-out to bridge a valuation gap where the buyer and seller disagree on future performance, letting the price reflect actual results rather than a single upfront number.
- A seller who stays on as managing director during the earn-out period negotiates specific operating constraints into the SPA to protect their ability to hit the targets that determine their payout.
- An accountant preparing completion accounts and earn-out calculations for a professional services firm ensures financial reporting during the earn-out period is consistent with how the business was run pre-completion, to avoid disputes over the payout figure.
How Advantage supports earn-out reporting
Advantage's EdgeFusion accelerator helps accountancy and advisory firms track the post-completion KPIs an earn-out depends on, giving clients and their advisors a clear, auditable view of performance against targets throughout the earn-out period.
Frequently Asked Questions
How long does a typical earn-out period last?
Earn-out periods commonly run for one to three years after completion, though the exact length varies from deal to deal depending on the targets set and how long it takes to reasonably assess whether they have been met.
What happens if the buyer and seller disagree over the earn-out calculation?
The Sale and Purchase Agreement typically sets out a dispute resolution process for earn-out disagreements, often referring the specific items in dispute to an independent accountant for a binding decision, since disputes over accounting treatment or how the business was run during the earn-out period are common.
Why would a seller agree to an earn-out instead of taking the full price upfront?
An earn-out can bridge a valuation disagreement between buyer and seller, may result in higher total consideration if the business performs well after completion, and can be the only way to close a deal when the two sides cannot agree a single fixed price.
