An earn-out is an acquisition model which sees the buyer of a business pay only a proportion of the purchase price when closing the deal, with the rest of it coming only if the business achieves certain KPIs. These might be EBITDA or revenue targets, and/or non-financial benchmarks such as the successful completion of beta testing and maintaining a specific percentage of clients. 

This deal structure has become increasingly common. In fact, between January and October 2025, M&A transactions with earn-outs amounted to USD 142bn globally, higher than any full-year since 2021. Filtering for private equity and venture capital exits with earn-out components there was an even more significant rise, with this cohort achieving its highest value since 2018. Let’s look at what’s been propelling the popularity of earn-outs, and why tech company owners should take note.

The resurgence in earn-outs is a response to the gap between the valuation expectations of buyers and sellers, which has widened in the years since the bullish seller’s market of the early 2020s. 

While sellers understandably seek the most generous possible valuations, buyers have adopted a more cautious outlook in a time of tighter capital markets, AI-fuelled valuation swings, geopolitical instability and increased scrutiny from boards and investors. The big advantage of earn-outs is that they create compromises between these contrasting perspectives, thereby making deals possible. 

Say a seller presents a higher degree of risk for the buyer – for example, because the seller is developing novel and untested technology, or operates in an emerging, unpredictable market where growth trajectories can shift quickly. An earn-out agreement will help mitigate some of this risk. This works the other way round too, allowing the seller to harvest more of the upside potential via earn-out structures capped not at 100% but at 120%, 150% or more of the agreed-upon target value.

Earn-outs also allow sellers to demonstrate confidence in the companies they have built. Agreeing to performance-based compensation signals tangible belief in a company’s future and can strengthen trust during negotiations. 

Another advantage of earn-outs is that they can improve alignment during the critical post-acquisition period. After all, acquirers are often buying not just technology or revenue, but also the founders and teams responsible for building the company’s momentum. Tying part of the payout to future results encourages employees to remain engaged and focused after the transaction closes. In the best-case scenario, both sides remain motivated by the same outcome, continuing the growth story that made the acquisition attractive in the first place.

The reason earn-outs still have a “bad rap” in some people’s minds is the possibility of disputes further down the line. Even when both sides negotiate in good faith, disagreements can emerge over how performance is measured and interpreted. Metrics that appear straightforward during negotiations, such as revenue growth, EBITDA targets, or customer retention, can become highly subjective once accounting policies or operational changes enter the picture.

If the seller and their team stay on post-transaction, they may feel frustrated at their sudden lack of control over how the business is run, especially if the buyer reduces resources, integrates teams differently, or redirects the product roadmap in ways that make the earn-out targets significantly harder to reach. 

Founders who once operated independently may suddenly find themselves navigating layers of corporate approvals, competing internal priorities, and shifting executive leadership while their compensation remains contingent on future performance. Another possible challenge may come in the form of the buyer levying internal charges, such as management fees for centralised services, thereby depressing profitability and other earn-out metrics.

In more contentious situations, earn-outs can lead to lengthy legal disputes over whether or not the buyer is justified in not paying out the agreed earn-out amount.

Complete clarity on deal terms will help you avoid disputes in the months and years after an earn-out is agreed, and it’s best to assume that every potential ambiguity in the deal will eventually be tested. 

For example, if the final pay-out is contingent on EBITDA milestones, it’s vital that both parties are clear on precisely how EBITDA will be calculated and which components are included or excluded from the formula. Without precise definitions in the share purchase agreement (SPA), buyers may have significant discretion to alter reported EBITDA through accounting decisions that were never contemplated when the deal was signed.

A seller should also try to negotiate post-closing covenants, which are protective provisions in the SPA requiring the buyer to operate the business in good faith and avoid actions primarily intended to prevent earn-out payments. If the seller is staying on with the company, it may be possible to negotiate retaining some form of control. For example, the ability to veto actions which could impact metrics, such as the replacement of key staff or a change in product lines.

This is all just scratching the surface of what an earn-out deal entails, and there’s no getting away from the fact that this is a highly complex and sensitive process which must be carefully tailored to the specific deal at hand. This is where having the right M&A advisory firm in your corner can be invaluable. 

If you feel the time is right to sell your business and would like to know how we can help steer you to an optimal outcome, we’d love to talk. Please contact our managing partner, Dr Jan Eiben, to introduce your company and discuss your M&A goals.

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