What sellers often miss
Many owners spend significant time negotiating the amount of an earnout and very little time negotiating the mechanics. Yet the definition of EBITDA, the treatment of expenses, the timing of measurements, and the degree of operational control often determine whether an earnout is ultimately paid. In many cases, the structure of the earnout matters more than the size of it.
The takeaway
View earnouts conservatively. Negotiate them carefully. Understand exactly how they will be calculated and what factors may influence the outcome. Most importantly, build your financial expectations around the guaranteed proceeds rather than contingent payments. Optimism is valuable in business. Earnout planning requires realism.
Illustrative, not your deal. Where the book uses dollar figures, they are there to show how something works, not to describe your business. Your banker, your accountant, and your attorney will put real numbers to your own situation. Full note.
Terms this chapter uses
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