What is an earn-out when selling a business?

Short answer. An earn-out pays part of the sale price later, depending on how the business performs after the sale. Buyers use it when value depends on the seller staying involved or on uncertain future results. It can bridge a price gap but carries risk for the seller, so the targets and measurement need careful drafting.

Why buyers ask for one

Earn-outs are common where goodwill depends on the owner or revenue is concentrated. The buyer shares the risk that earnings fall after the handover.

What sellers should check

• How the targets are measured and who controls the accounts after sale.
• Whether the buyer can change things that affect the result.
• What happens if the business is merged or restructured.

Legal advice on the contract is essential.

General information only. It does not take account of your circumstances and is not legal, tax or financial advice.