Earn-Outs: Why Sellers Don’t Get Paid
Earn-outs, once a fundamental provision of M&A deals at all levels, are going out of style in the small- to medium-sized business (SMB) and lower middle market (LMM) sectors. This trend is driven by the reality that many earn-outs never get paid.
Without earn-outs, companies are selling at lower valuations but with higher certainty of payment. This is exactly what sellers want.
What is an earn-out?
An earn-out is a portion of the purchase price that is paid after closing, contingent on the business meeting certain performance targets.
Those targets are usually based on revenue, profits, or other financial metrics measured over a defined post-closing period.
A typical structure might involve a fixed payment at closing and an additional amount payable over one to three years if agreed benchmarks are achieved.
In theory, this allows buyers and sellers to “share the risk” of future performance. In practice, it allows buyers to rig the operations and cook the books so that sellers get paid less.
Why are earn-outs bad for the seller?
After closing, control of the business shifts to the buyer. That control affects nearly every variable that determines whether an earn-out is achieved.
Buyer controls operations
The buyer controls marketing, sales, staffing, pricing, capital investment, and growth strategy. Even decisions made in good faith can materially impact short-term performance metrics that drive earn-out payments.
Buyer controls accounting
The buyer also controls the books. Expense allocation, revenue recognition, management fees, and overhead assumptions can all influence whether earn-out thresholds are met.
Why nonpayment of earn-outs is hard to litigate
Earn-out disputes are common, but enforcement is often impractical.
Litigating an earn-out claim is expensive and time-consuming. In many SMB transactions, the cost of pursuing the dispute approaches or exceeds the amount of the earn-out itself. Proving bad faith or improper manipulation is also difficult, particularly where the buyer retains broad operational discretion.
As a result, many sellers never fully pursue earn-out claims, even when they believe payment was unfairly withheld.
Earnout considerations for wealth planners
Earn-outs also complicate post-closing financial planning.
After a sale, sellers already face uncertainty related to taxes, reinvestment, and market performance. Contingent consideration adds another variable that is difficult to model and impossible to control.
For wealth managers advising sellers, deferred and uncertain proceeds make long-term planning significantly harder than planning around cash received at closing.
Earnout considerations for investment bankers
Investment bankers have increasingly adjusted their approach to earn-outs.
In 2026, many bankers are heavily discounting earn-out value when advising sellers and cautioning against treating earn-outs as equivalent to cash. In some cases, bankers are recommending lower guaranteed purchase prices over higher headline numbers tied to contingent payments.
This reflects a broader market recognition of how earn-outs function in practice, particularly in SMB transactions.
Bottom Line:
Earn-outs are not inherently flawed, and they can work in the right deal.
But in SMB M&A, sellers are increasingly prioritizing certainty over contingent upside, taking a lower guaranteed price rather than a higher price dependent on an earn-out that is difficult to enforce.
Pro Tip 1: If the buyer insists on you having skin in the game post-closing, negotiate equity in the buyer (aka “rollover”) in lieu of an earn out.
Pro Tip 2: If you must accept an earn out, instruct your lawyer to include provisions in the contract requiring the buyer to operate the business in a manner that supports the earn out and maintains pre-closing accounting methods. This is not a bulletproof solution, but it helps.