When a buyer won’t meet your price upfront, an earn‑out can help bridge the gap, tying part of the sale price to how your business performs after completion. It can get a deal over the line, but for sellers it also brings uncertainty and risk.
This article is for founders and owners of fast‑growth or high‑potential UK businesses who may be offered an earn‑out, especially if you’ll stay involved post‑sale. You’ll learn how earn‑outs are built into the share purchase agreement (SPA), which performance metrics are safer for sellers, how to keep influence after completion, and the legal protections that reduce the chance of disputes.
If you’re weighing an earn‑out or negotiating terms now, speak to our M&A lawyers to shape clear, fair terms that protect your position.
Contents:
- Negotiating the structure in the SPA
- Choosing fair and achievable performance metrics
- Maintaining influence post-completion
- Legal protections and risk management
- Insist on consistent accounting and reporting obligations
- Using security and payment protections
- Dispute resolution and enforceability
- Common seller concerns
- Why legal advice matters
Negotiating the structure in the SPA
The details of an earn-out are set out in the share purchase agreement (SPA). The SPA is the core legal contract between you and the buyer, and it governs how, when, and under what conditions any deferred payments will be made.
Clarity on timing, conditions, and payment mechanisms
One of the most important steps is ensuring the timing of payments is clearly defined. Will these be made quarterly, annually or only once at the end of the earn-out period? The difference matters: a three-year earn-out with a single payment at the end creates far more risk for the seller than one with annual instalments.
The conditions also need to be nailed down. For example:
- Does the business need to achieve a specific revenue figure, profit margin, or customer growth target?
- What is the exact formula for calculating whether the target has been met?
- Will performance be assessed by an independent accountant or by the buyer’s finance team?
The payment mechanism (how funds flow once targets are hit) should also be explicit. For example, is payment automatic once the accounts are signed off, or does it depend on the buyer’s discretion?
A well-structured SPA eliminates uncertainty and reduces the chance of later disputes.
Watch for vague drafting
Vague drafting is one of the biggest dangers for sellers. Earn-out clauses that are imprecise, or that leave too much discretion in the buyer’s hands, can become a tool for avoiding payment.
For example, imagine an SPA that says the earn-out will be based on 'net profit.' Without a definition of how net profit is calculated, the buyer could adjust accounting policies, allocate central costs to your business, or delay investment to make the numbers look worse.
Example: A seller agrees an earn-out tied to net profit but fails to specify the calculation method. After completion, the buyer starts charging substantial 'group management fees' to the acquired company. On paper, profits collapse, and the seller’s earn-out vanishes. The court ultimately sides with the buyer, noting that the SPA gave them discretion. The seller recovers nothing beyond the upfront sum.
The lesson? Never rely on generic terms. The SPA must include detailed definitions of the financial metrics used. Otherwise, you risk leaving the buyer with the power to rewrite the rules after completion.
Choosing fair and achievable performance metrics
The metrics chosen for the earn-out determine not only how achievable it is, but also how much control you retain over your financial future.
Favour metrics you can influence
As a seller, you want metrics that reflect areas where you have direct influence. If you’re staying on in a management or advisory role, metrics such as revenue, gross profit or customer numbers may make sense, because your decisions on sales and strategy can directly affect them.
Metrics like net profit or EBITDA can be riskier, because they are easily distorted by accounting policies, group cost allocations or investment decisions made by the buyer.
You should also be wary of earn-outs tied to non-financial metrics such as product launches or market share, unless those are areas you truly control.
A practical tip is to ask yourself: If the business underperforms, would I feel it was within my control to have changed the outcome? If the answer is no, the metric is a poor choice.
Maintaining influence post-completion
Earn-outs often assume you’ll remain involved in the business for a period after completion, to help deliver results. This can be a positive arrangement, but only if the scope of your role is clearly defined.
Secure a role if needed to hit targets
If your earn-out depends on performance, you’ll want some ability to influence that performance. This usually means securing an advisory or operational role post-sale.
For example, if revenue growth is the key metric, you may need continued involvement in business development or client relationships. Without that role, you may feel powerless as the earn-out slips out of reach.
Define boundaries on what you’re expected or allowed to do
At the same time, you don’t want to be on the hook indefinitely. The SPA should define:
- Your time commitment (e.g. two days per week).
- Your responsibilities (e.g. overseeing sales, not finance).
- The boundaries of your decision-making authority.
This avoids later disputes about whether you did 'enough' to deliver the targets or whether you overstepped your remit.
Legal protections and risk management
Even with fair metrics and a defined role, sellers remain exposed to risks if the buyer makes decisions that undermine the earn-out.
Prevent buyers from undermining the earn-out
Buyers may, intentionally or not, take steps that reduce the chances of hitting targets.
Examples include:
- Restructuring the business and diverting resources elsewhere.
- Cutting costs in a way that damages growth.
- De-prioritising your division in favour of another part of the group.
The SPA can include covenants requiring the buyer to run the business in the 'ordinary course' and not to take actions designed to frustrate the earn-out.
Insist on consistent accounting and reporting obligations
Sellers should also insist on:
- Consistent accounting policies, so figures aren’t manipulated post-sale.
- Regular reporting obligations, so you can see how performance is tracking.
- Access rights to financial information, so you’re not left in the dark.
These provisions reduce the risk of nasty surprises when the earn-out is calculated.
Example: A technology business sells to a private equity-backed buyer with a three-year earn-out based on revenue. The founders negotiate covenants requiring the buyer to maintain existing sales staff levels and to continue marketing spend at agreed minimums. Midway through year two, the buyer attempts to slash the marketing budget. The sellers successfully rely on the covenants to prevent the cut, protecting their ability to hit targets and ultimately securing the full earn-out.
The lesson: don’t just accept goodwill. Build in contractual protections to stop the buyer undermining performance.
Using security and payment protections
Even if the targets are met, you still need protection against the risk that the buyer doesn’t pay.
Options include:
- Minimum thresholds, ensuring a guaranteed base payment regardless of performance.
- Interest on late payments, to deter delays.
- Penalties for missed deadlines.
- Escrow accounts, where funds are held by a third party.
- Bank guarantees or parent company guarantees, if the buyer is a subsidiary.
Each of these mechanisms adds a layer of security, making it harder for the buyer to walk away from their obligations.
Dispute resolution and enforceability
Unfortunately, disputes over earn-outs are common. That’s why it’s essential to agree in advance how disagreements will be resolved.
Insert clear dispute resolution clauses
Typical mechanisms include:
- Requiring disputes over calculations to be referred to an independent accountant.
- Mediation or arbitration clauses to avoid drawn-out litigation.
- Clear timelines for raising and resolving disputes.
Ensure remedies are enforceable
It’s not enough to have rights on paper, you need to ensure they can be enforced in practice.
That may mean:
- Choosing a jurisdiction with reliable courts.
- Ensuring there are assets or guarantees available to enforce against.
The goal is to avoid a situation where you 'win' on paper but can’t collect the money.
Common seller concerns
Earn-outs raise a number of recurring worries for sellers:
- Buyer actions post-sale affecting targets, such as cutting staff or shifting priorities.
- Reduced visibility and control, leaving you unsure how the business is really performing.
- Risk of non-payment, even when targets are achieved.
All of these concerns can be addressed, at least in part, through careful drafting of the SPA.
Why legal advice matters
Earn-outs sit at the intersection of law, finance and commercial negotiation. Without specialist advice, it’s easy for sellers to find themselves exposed.
Specialist M&A lawyers can:
- Draft protective clauses that prevent manipulation.
- Insist on clear, precise definitions to avoid ambiguity.
- Anticipate risks and build in safeguards.
- Ensure the SPA is seller-friendly, not just balanced.
In practice, the cost of legal advice is tiny compared to the value of a disputed earn-out. Sellers who involve lawyers early are far more likely to secure terms that protect their interests and to avoid costly disputes later.
Earn-outs can be a useful tool to bridge the gap between buyer and seller expectations. But for sellers, they carry risk. Success depends on negotiating clear terms, choosing fair metrics, securing influence post-sale, and putting legal protections in place.
If you’re considering selling your business and an earn-out is on the table, take advice early. With the right strategy, and the right legal support, you can protect your position, reduce uncertainty, and maximise the value of your hard work.
Our M&A lawyers advise UK businesses on mergers and acquisitions of all shapes and sizes. Whether you’re exploring your sale or refining a deal already in motion, we’ll help you approach it strategically and get the detail right.
