Why earnouts are still used in private M&A
An earnout in M&A is a form of contingent consideration. Instead of paying the full price at closing, the buyer pays part later if agreed targets or milestones are met. Earnout structures remain common because they help close deals when buyer and seller cannot agree on value with enough confidence to settle entirely in cash at close.
That is not just theory. SRS Acquiom says that in roughly one in five private-target transactions it tracks, the parties could not agree on a fixed purchase price paid entirely at closing and instead made part of the consideration contingent on post-closing performance. A 2024 academic study based on a survey of 129 investors likewise found that earnouts are used mainly to reduce information asymmetries and bridge “negative agreement zones,” meaning situations where buyers and sellers cannot otherwise agree on price.
Recent deal-term studies show that prevalence is meaningful but not stable. K&L Gates’ summary of the ABA 2025 Private Target Deal Points Study says earnout use in its middle-market sample fell from 26 percent in the prior study to 18 percent in the 2025 study. Harvard’s 2025 analysis of private M&A data says that outside life sciences, earnout use rose from 15 percent in 2019 to a peak of 30–37 percent in 2023 before settling at roughly 22 percent in 2024. The pattern suggests that earnouts expand when valuation gaps widen and contract when markets become easier to clear.
Conclave Partners should therefore treat earnouts as a pricing and risk-allocation tool, not as automatic upside for the seller. They are most useful when both sides face a genuine valuation gap, some measurable post-closing variable, and a reasonable belief that the business can still be assessed fairly after the buyer takes control.
Bridging valuation gaps
Earnouts work best when the gap is real. If the seller wants credit for growth that has not yet appeared in normalized results and the buyer does not want to prepay for it, an earnout can move part of the disagreement into a later performance-based payment.
Managing uncertainty in earnings or growth
They are also used when growth is plausible but not yet proven, when a concentration issue may resolve, or when a product launch or commercial milestone sits just beyond closing. The basic logic is to move disputed future value out of the upfront price and into a measurable post-closing mechanism.
Reducing upfront consideration and aligning incentives
From the buyer’s perspective, earnouts lower upfront cash and reduce overpayment risk. From the seller’s perspective, they can preserve headline value if the business performs. SRS notes that some agreements also keep sellers or key managers involved after closing to support continuity, though that same feature can later create tension.
When earnout structures genuinely help a deal
Earnouts are not inherently bad. They help when the deal has a real pricing problem that cannot be solved cleanly in another way, and when the performance being measured can still be observed after closing without too much manipulation.
The clearest case is a real valuation gap rather than simple seller anchoring. If the seller wants credit for growth that has not yet shown up fully in the numbers, and the buyer does not want to prepay for that growth, an earnout can be an honest bridge. The academic evidence on investor perceptions points in that direction: earnouts are used to manage information asymmetry, not only to push risk onto sellers.
A second good case is where performance is measurable in a relatively objective way. Harvard’s 2025 earnout review says most earnouts use financial metrics, with revenue being the most popular metric, followed by earnings or EBITDA. It also explains why preferences diverge: sellers tend to prefer revenue because it is less exposed to post-closing cost allocations and accounting judgments, while buyers often prefer net income or EBITDA because those metrics track profitability more closely. In practice, a revenue earnout or milestone-based structure is often safer for sellers than a heavily adjusted EBITDA earnout if the buyer will control budgets, integration, overhead allocations, or accounting treatment after closing.
A third good case is where the business can be tracked separately. If the target will continue operating as a reasonably distinct unit, with separate books and identifiable revenue, the earnout has a better chance of being measured fairly. If the buyer plans to integrate immediately and blend operations, even a sensible metric can become difficult to verify. That follows directly from Harvard’s emphasis on post-closing control, separate books and records, and the risk that business changes during the earnout period distort achievement.
A fourth condition is seller influence. If the seller remains in a role that materially affects the outcome, the structure may align incentives rather than simply transfer risk. That does not eliminate conflict, but it can make the bargain more coherent. SRS explicitly notes that some deals keep seller executives or stakeholders involved after closing, although it also warns that this can create friction if buyer and seller want different things from the business.
Revenue, EBITDA, and milestone logic
CMS’s European M&A Study 2024 shows how market practice reflects this tension. In 2023, earnouts remained slightly more common in Europe than in the U.S., at 23 percent versus 21 percent, and the study highlighted a sharp difference in metric choice: EBITDA or EBIT was more popular in Europe, while revenue was most commonly used in the U.S. CMS also noted that revenue is less subjective and therefore more seller-friendly.
When earnout structures destroy value instead of preserving it
The main danger of an earnout is that it can look like purchase price while behaving like litigation risk. Harvard’s 2025 earnout analysis quotes Vice Chancellor Laster’s observation that an earnout often turns today’s price disagreement into tomorrow’s litigation over outcome.
The first value-destroying feature is subjectivity. If the metric is complicated, highly adjusted, dependent on management discretion, or vulnerable to accounting choices, the seller is accepting a moving target. An EBITDA earnout can become especially contentious if the buyer can change cost allocation, hiring, integration spend, transfer pricing, or investment priorities after closing. Harvard’s review repeatedly stresses that vague milestones and poorly defined standards invite exactly this type of dispute.
The second problem is buyer control. SRS states the issue plainly: after closing, the business is owned and controlled by the buyer, and sellers may find themselves with inadequate information, little influence, and a business that changes direction in ways that reduce or eliminate the earnout. That is why an earnout should never be treated as equivalent to cash.
The third problem is integration. If the buyer absorbs the target into a larger platform, changes systems, centralizes functions, or repurposes assets, isolating performance can become difficult or impossible. Even without bad faith, the metric may stop meaning what the seller thought it meant at signing. That risk is embedded in the seller-protective covenants discussed in Harvard’s analysis, especially provisions about separate books, standalone operation, and restrictions on changing the business during the earnout period.
The fourth problem is time. Harvard’s 2025 review says the median earnout period outside life sciences is 24 months, and that, as a rule of thumb, the more money allocated to the earnout and the longer the period, the more likely disputes become. White & Case, citing SRS data, likewise notes that the median earnout length for earnouts struck in 2024 was 24 months.
The payout data is sobering. SRS says earnouts achieve about 21 cents on the dollar and are contested at least 28 percent of the time. Of the 59 percent of deals that paid anything on the earnout, 17 percent required renegotiation to avoid litigation. SRS also says that, among deals with any earnout achievement, only about half of the maximum earnout dollars were actually paid. Those are not numbers that justify treating contingent consideration as face-value price.
Conclave Partners should therefore discount earnouts aggressively when advising sellers. A lower all-cash price and a higher headline price that includes a large earnout are not economically equivalent. One is money. The other is a future claim whose value depends on drafting, measurement, control, reporting, and the buyer’s post-closing behavior.
The document often postpones disagreement instead of solving it
This is why bad earnouts destroy value. They do not bridge a price gap cleanly. They defer the argument. If the parties have not already agreed on measurement rules, accounting policies, permitted changes in strategy, dispute procedures, reporting rights, and acceleration mechanics, the SPA has only moved the disagreement forward.
How market practice actually structures earnouts
Market practice matters because it shows what parties are actually willing to sign.
Harvard’s 2025 analysis of SRS data says that, outside life sciences, the median size of earnout transactions was 31 percent of closing payments in 2024. In a typical earnout deal, a significant part of what the seller thinks it sold for is not being paid at closing.
The same analysis says the median earnout period outside life sciences is 24 months. CMS adds that in 2023 the most common earnout duration was 12 to 24 months, representing 42 percent of earnout deals, while periods of more than 36 months remained a minority. The market has not eliminated long earnouts, but the center of gravity is around one to two years.
Metrics also follow a pattern. Harvard says revenue is the most popular metric overall, followed by earnings or EBITDA. CMS found that EBITDA or EBIT was the most common basis in Europe in 2023, while revenue was most common in the U.S. Buyers prefer metrics tied to profitability; sellers prefer metrics less vulnerable to accounting discretion.
Post-closing covenants and acceleration mechanics are also part of market structure. Harvard reports that 25 percent of transactions with earnouts in the latest ABA private-target study included at least one specific post-closing covenant such as operating consistent with past practice, maximizing the earnout, or running the business as a stand-alone entity or division. Eight percent included at least two such covenants, while 58 percent included some other protective language. The same article says that almost 25 percent of non-life-science transactions that closed between 2014 and 2023 included an acceleration provision triggered by a change in control of the target or the earnout assets.
The negotiation points that decide whether an earnout works
Most earnout risk is created or reduced in drafting. The concept itself is not the main problem. Ambiguity is.
Conclave Partners should start with metric definition. If the earnout is based on EBITDA, revenue, or another financial measure, the agreement needs to define how that metric will be calculated, what accounting standard applies, how exceptional items will be treated, whether integration costs are included, and how intercompany allocations will work. Harvard’s analysis stresses that milestones should be clearly defined and that parties should involve the business team, accountants, and tax advisers, not just lawyers, when drafting.
The second negotiation point is operational control. If the buyer can materially change the business during the earnout period, the seller needs to know what protection exists. Harvard’s 2025 review lists the kinds of protections sellers typically try to negotiate: consistent-with-past-practice operation, commercially reasonable efforts, restrictions on bad-faith impairment, maintenance of separate books and records, minimum working capital, limits on new debt, and restrictions on disposing of the earnout business. These are not cosmetic clauses. They determine whether the seller has any realistic chance of earning what the headline deal suggests.
The third point is information and verification. A seller should have reporting rights, access to relevant books and records, and a clear timetable for earnout statements and objections. Harvard specifically points to reporting, access, and commercially reasonable means of verification as tools for surfacing disagreements earlier.
The fourth point is dispute resolution. Many earnout fights are really fights about whether a dispute belongs before an accounting expert, an arbitrator, or a court. Harvard notes that parties often end up disputing even the dispute process itself if this is not addressed clearly in the agreement.
The fifth point is acceleration and buyout mechanics. If the buyer sells the acquired business, terminates a key seller-manager without cause, or changes the structure in a way that makes the earnout impossible to measure, the seller should know whether unpaid amounts accelerate, whether only earned amounts accelerate, or whether the buyer has a buyout right. Harvard’s review says almost a quarter of non-life-science transactions in the SRS data included change-of-control acceleration.
Drafting discipline is where value is won or lost
A well-drafted earnout can still be hard to collect. A poorly drafted one is often not worth its face amount at all.
Earnouts versus other ways to bridge a price gap
An earnout is not the only way to bridge a valuation gap. A seller note pushes payment into the future too, but as debt rather than as performance-based contingent consideration. Rollover equity also shifts value into the future, but through continued ownership rather than a narrowly drafted formula. A purchase-price adjustment solves a different problem again: closing-balance-sheet accuracy, not future performance.
Sometimes the best alternative is simply a lower all-cash price. That sounds unattractive until the seller looks at current market structure. IBBA and M&A Source’s Q4 2025 survey results said sellers averaged between 76 percent and 89 percent cash at close, depending on size band, and that earnouts and retained equity were used sparingly. That matters because it shows the market still places substantial value on certainty.
How earnout risk changes in small and mid-sized business sales
The best hard data on earnouts often comes from broader private-target studies, not pure Main Street deals. That caveat matters. Still, the basic risks become sharper in smaller businesses. The ABA 2025 private-target study covered middle-market deals with purchase prices from $25 million to $900 million, and the broader SRS data is also not purely Main Street. Sellers in smaller companies should read those statistics as directionally useful rather than perfectly identical to every lower-end business sale.
First, smaller businesses are often founder-dependent. If customer relationships, pricing discipline, hiring, or execution depend heavily on one person, the buyer’s post-closing changes can affect the earnout quickly.
Second, reporting systems are usually weaker. A middle-market sponsor-backed company may be able to track a business unit with reasonable discipline. A smaller founder-led business may not have that infrastructure, which makes measurement disputes more likely.
Third, integration can blur results fast. If the buyer merges systems, teams, brands, or sales channels, a small business can disappear into a larger operation within months, making “performance of the acquired business” much harder to isolate.
For those reasons, smaller businesses should generally prefer simpler formulas, shorter periods, clearer reporting rights, and less contingent value overall. That is an inference from how earnout disputes arise and from the fact that even larger private deals struggle with clarity, measurement, and control.
A practical decision framework before accepting an earnout
Before accepting an earnout, the seller should ask a short set of hard questions.
Can the metric actually be measured cleanly after closing? If the answer depends on buyer discretion, integration choices, or flexible accounting judgments, the earnout is weaker than it looks.
Who controls the outcome? If the buyer can affect the earnout materially through staffing, cost allocations, sales attribution, product timing, or capital decisions, the seller is taking control risk in addition to performance risk.
How much of the purchase price is truly at risk? Harvard says the median earnout size outside life sciences was 31 percent of closing payments in 2024. That is enough to change the economic character of a deal. Sellers should model that part of the price as contingent, discounted, and potentially disputed.
What protections exist if the buyer changes the business? Post-closing covenants, access rights, defined accounting rules, dispute procedures, and acceleration clauses are not legal decoration. They are the earnout.
Would I still do this deal if I heavily discounted the earnout? Conclave Partners should encourage sellers to ask that question directly. If the answer is no, the seller probably does not have a good earnout. It has a headline number masking a much lower certain price.
Conclusion
Earnout structures can help when they solve a real valuation gap, rely on measurable performance, and sit inside a carefully drafted framework with credible seller protections. They destroy value when they turn price into a post-closing argument over metrics the seller no longer controls.
The current market data supports a cautious reading. Earnouts remain a real feature of private M&A, but they are not collected at face value, they are contested often enough to matter, and they often pay far less than their headline maximums. Sellers should therefore view an earnout as risk allocation first and upside second.
FAQ
What is an earnout in M&A?
An earnout is a form of contingent consideration in which part of the purchase price is paid after closing if agreed milestones or performance targets are achieved.
When does an earnout help bridge a valuation gap?
It helps when buyer and seller disagree in good faith about future performance, and when that future performance can still be measured fairly after closing.
Why do earnouts so often lead to disputes?
Because the buyer controls the business after closing, the metrics may be subjective, and the parties often leave too much unresolved in drafting. Harvard’s 2025 analysis and SRS’s claims data both point to meaningful dispute and renegotiation risk.
Is a revenue earnout safer than an EBITDA earnout for sellers?
Often yes, because revenue is generally less exposed to post-closing cost allocations and accounting treatment. But it can still be distorted if sales attribution or channel structure changes.
How long should an earnout period last?
There is no universal answer, but current market practice centers around one to two years. Harvard reports a 24-month median outside life sciences, and CMS found 12–24 months was the most common duration in Europe in 2023.
What seller protections should be included in an earnout clause?
Defined metrics, accounting methodology, post-closing covenants, access to books and records, reporting rights, dispute mechanics, and acceleration provisions are the core protections.
When should a seller reject an earnout entirely?
A seller should strongly consider rejecting it when the metric is too subjective, the buyer will integrate immediately, reporting will be weak, or the seller would not accept the deal if the earnout were discounted heavily.
Ildar Zakirov — Conclave Partners ildar@conclavepartners.com
Sergi Kosiakof — Conclave Partners sergi@conclavepartners.com
