Earn-out
A portion of the sale price contingent on hitting performance targets (revenue, EBITDA, customer retention) after closing. A mechanism that bridges the gap between the seller's and the buyer's price expectations.
Definition
An earn-out is an additional payment the seller receives after closing, contingent on hitting performance targets defined in advance. Unlike a vendor take-back (VTB), which is a fixed amount paid over time, an earn-out is variable — it can end up at zero if the targets aren’t met.
In French-language Quebec documentation, you’ll see complément de prix conditionnel used for the same concept.
Why the earn-out exists
The earn-out bridges a disagreement on value. The seller believes the business is worth more, the buyer sees risk. The earn-out says: “Let’s prove it together — if the business performs the way the seller predicts, they’ll receive the top-up.”
Typical structure
- Duration: 1 to 3 years after closing
- Targets: revenue, EBITDA, retention of key customers, or a combination
- Amount: generally 10% to 30% of the total price
- Measurement: periodic financial audits based on criteria defined in advance
Risks for the seller
- You no longer control the business — the new owner’s decisions directly affect whether the targets are hit
- Calculation methodologies (EBITDA definition, treatment of expenses) have to be specified precisely in the contract
- Earn-out disputes are common — contract clarity is essential
What every seller should know
- Treat the earn-out as a potential bonus, not as a guaranteed part of the price — base your financial decisions on the certain price (at closing)
- The more involved you stay after the sale (transition period), the more influence you have on hitting the targets
- Have your lawyer negotiate the earn-out terms — the measurement and verification details make all the difference