When is an earn-out the right answer to a price gap?

BDC describes earnouts as contractual clauses in a business sale where part of the purchase price is paid to the seller after the deal closes. That can make them a way to bridge a disagreement about what the business will earn, not a way to raise a price the buyer does not believe. Whether one is right for you depends on the reason the two numbers are apart.

Work out why the numbers differ

BDC says a business’s price is fundamentally determined by its perceived value to a potential buyer, which is often a blend of financial performance, future potential of growth and strategic fit. If the gap comes from the growth forecast, a deferred payment tied to results speaks to exactly that disagreement. If it comes from a hidden debt or a defect found in due diligence, a deferred payment does not fix the underlying problem.

Questions to settle before you agree

A payment that depends on future results leaves part of your proceeds exposed after you hand over the keys. Before you accept one, ask these questions and have a lawyer and an accountant read the wording.

• What is measured, and how is it defined? Revenue, gross profit and earnings can move for different reasons.
• Who controls the levers that move the number after closing, and what are they allowed to change?
• How long does the measurement period run, and what happens if the buyer sells or merges the business inside it?
• Who prepares the figures, can you review the records, and how are disputes settled?
• How does the unpaid part rank against the buyer’s lender if the buyer cannot pay?

Weigh it against the other ways to close a gap

BDC’s guidance on negotiating a sale says true negotiation is a process of making realistic adjustments based on deep dives into the selling business’s health, and that significant price adjustments typically occur during the buyer’s due diligence period. Ask whether your gap could close with better records or a revised price instead. Our page on earn-ins and earn-outs explains the related structure, and vendor take-back financing is a different kind of deferred payment.