6. Should Your Client Accept an Earn-Out?

business brokers manage the sales process methodically and professionally

the pros, cons and pitfalls brokers need to help sellers navigate

When buyers and sellers can’t quite agree on value, earn-outs often enter the picture.

They sound simple - “We’ll pay you $X now, and another $Y if the business hits target over the next 12 months.”

But beneath that simplicity lies a minefield of expectations, assumptions, and risks.

💡 What Earn-Outs Are Supposed to Do

Earn-outs are designed to-

• Bridge a valuation gap
  If the seller is convinced the business is worth more than the buyer sees now, a performance-based payout can help close the gap.

• Reduce buyer risk
  The buyer doesn’t have to pay full price upfront and only pays the balance if certain targets are met.

• Incentivise a smooth transition
  Sellers stay engaged to ensure success, which reassures buyers who are worried about dependency.

🚨 But They’re Also Fraught with Risk

Especially for the seller, who may not be in full control post-sale. Key risks include -

• Unrealistic performance targets
  Set too high, and the earn-out becomes unattainable, even if the business performs well.

• Buyer mismanagement
  If the new owner makes decisions that tank performance, the seller might lose their payout through no fault of their own.

• Lack of clarity
  Vague language around targets, timeframes, or calculation methods leads to disputes.

• Emotional baggage
  Many sellers feel like the earn-out is a test they shouldn’t have to pass.

🛠 When to Recommend an Earn-Out (and When to Avoid It)

✅ A well-structured earn-out can work when -

• The seller is staying involved short-term (e.g. 6–12 months)

• The targets are tied to metrics the seller can influence

• There’s a clear dispute resolution mechanism

• The earn-out is a bonus - not essential to making the deal work

🚫 Avoid or be cautious when -

• The buyer has full operational control and the seller doesn’t

• The seller emotionally resents the concept

• The performance targets rely on external variables (e.g. industry recovery)

• The structure feels “punitive” or based on mistrust

🔎 Key Clauses Brokers Should Watch For

Advise your sellers to carefully review -

• Definition of performance metrics (e.g. revenue vs. gross profit vs. EBITDA)

• Timeframes (e.g. 12 months, 24 months - shorter is safer)

• Conditions under buyer control (e.g. hiring/firing, marketing budget)

• Access to reporting (so the seller can track performance)

• What happens if the business is sold again or merged

🧠 How to Reframe the Conversation with Your Seller

Sellers often get defensive or skeptical when earn-outs come up. Try using this language -

• “An earn-out isn’t about trust - it’s about timing.”

• “It’s a way to get to your number without making the buyer overreach.”

• “Let’s look at how we can structure this so it protects you, not punishes you.”

• “Think of it as a bonus - not a gamble.”

🤝 Final Thought

Earn-outs are tricky - no question.
But they’re also one of the most common tools used to get deals across the line when there’s a gap to bridge.

As a broker, your job isn’t to push one way or the other - it’s to help sellers see the options clearly, and structure the deal intelligently.

If you’re in the middle of an earn-out negotiation right now - or you’ve got a seller digging their heels in, let’s talk.

👉 Book a free 15-min strategy call https://www.regenerationhq.co.nz/contact
👉 Or reply to john.luxton@regenerationhq.co.nz and I’ll share a sample earn-out structure that works.