Earn Out





As a California business broker, I have facilitated deals which used earn outs. An earn out is a method of compensating sellers over time. An earn out is generally a formula that dictates that the owner receive a percentage of the revenue or profit for a defined period of time. Business brokers often suggest an earn out as a way for buyers and sellers to compromise when they cannot agree on price.

Earn outs are not uncommon. A recent Business Week article noted that 30%-50% of acquisitions involve an earn out. Generally the earn out portion is 15-30% of the purchase price - however with very small businesses, that are highly relationship based, a small down payment with an earn out may be the only way to sell a business.

An earn out is also a viable option when a business falls into one or more of these categories:

Professional practice
Client based service business
Owner "is" the business (very small)
Sales very dependent on the owner's relationships
Customer concentration issue
Highly speculative business
Rapidly growing business
Declining business / turnaround
Business is very dependent on the owner's expertise
Lenders will not finance

Unlike carrying a note, where the payments are fixed, the payment may fluctuate depending on sales. In both cases sellers have some risk but in the case of an earn out, sellers have a greater interest in ensuring a smooth transition and continued growth. A business acquisition is an investment in the future earnings of the enterprise. An earn out is a tool buyers use to mitigate risk.

For the Seller an earn out means:

Differed compensation, often lower taxes
Higher risk
It may mean greater total compensation than without an earn out
Sellers maybe more involved with the business post-sale that otherwise
If the business falters there may be a period of time where the payments cease or decrease
Viable tool for a partner buyout

For the Buyer an earn out means:

Mitigation of risk
Means of retaining clients / customers
Sellers are often more involved with the business post-sale that otherwise
An opportunity to acquire a business that is higher risk / more speculative
Bonus payment or balloon payments may be due if certain targets are met
The owner has a financial interest in the transition


If you are a successful business owner in the Southern California area and would like a professional business broker to help structure an earn out for your business, I would be happy to speak to you. All inquiries are confidential and there are never any upfront fees. Please contact me today.



Click here to go to the California Business Broker .com contact page

Return to Deal Structuring and read about other forms of compensation beyond an earn out.

Return to the California Business Broker .com home page