Earn-outs explained: what UK sellers should know

Very few private company sales are entirely cash on completion. Most include some deferred element, and often an earn-out that links part of the price to performance after you sell.

Buyers use earn-outs to bridge a valuation gap and to keep the seller engaged through a transition. Handled well, an earn-out can lift total consideration above what a straight cash offer would deliver. Handled badly, it becomes a payment you never see.

The detail that matters is measurement. What metric is used, revenue or profit? Who controls the costs that affect it? What happens if the buyer changes pricing, reallocates overheads or restructures the team? A profit-based earn-out inside a buyer's group is only as reliable as the protections written around it.

Sensible earn-outs share several features: a short measurement period, usually one to two years, a metric the seller can influence, clear accounting rules agreed in advance, and protection against buyer decisions that reduce the number artificially.

Also consider what happens on a subsequent sale of the buyer, on your departure, or if targets are missed narrowly. Sliding scales are usually fairer to both sides than an all-or-nothing threshold.

Our position with clients is straightforward. Maximise the cash on completion, treat any earn-out as a genuine possibility rather than a certainty, and negotiate the mechanics as carefully as the headline number.