I still remember the call like it was yesterday. A buddy of mine sold his logistics company for what sounded like a beautiful number. We popped bottles. Six months later, he called me sounding like someone had stolen his dog. The earnout hadn’t paid out. Not a dime of it. The buyer had “restructured” a few things, missed a few targets, and poof. That second check vanished into thin air.
That story isn’t rare. It’s practically a rite of passage in M&A. And here’s the part that stings. Most sellers never see it coming because the deal looks so clean on paper.
What Is an Earnout Trap in Business Sales?
Quick refresher for anyone lucky enough to have never dealt with this. An earnout is a deal structure where part of the purchase price gets paid later, contingent on the business hitting certain targets. Revenue goals. EBITDA milestones. Customer retention numbers. Sounds fair, right? Seller gets full value if the business performs. Buyer gets protection if it doesn’t.
Except when it’s not fair. When the structure is stacked so the seller never collects.
I’ve watched this play out more times than I care to admit. The pattern is almost predictable once you know the tells.
How Brokers and Buyers Stack the Deck
Here’s where it gets sneaky. Not every earnout trap is malicious. Some are just lazy deal structuring. Either way, you eat the loss. Watch for these:
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Impossible targets. The earnout hinges on growth that the buyer’s own projections don’t support. Do the math yourself before you sign. Run the numbers cold.
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Metrics you don’t control. Revenue targets sound great until you realize the buyer controls pricing, staffing, and marketing after closing. You’re hitched to their decisions.
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“Ordinary course of business” language. Vague enough to mean anything. Buyers can shift expenses, reassign accounts, or bury your product line and still claim they acted normally.
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No acceleration clause. If they sell the company again or fire you, the earnout should pay out immediately. If that clause is missing, they hold all the cards.
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Accounting games. EBITDA targets are a playground for creative bookkeeping. Chargebacks, allocated overhead, one-time fees. It adds up fast.
A broker who knows what they’re doing will flag these. A broker who’s just chasing a closing will gloss right over them. Guess which kind shows up more often.
The Real Conversation You Need to Have
Before you sign anything with an earnout attached, sit down and ask one question. “What happens if the buyer decides not to hit these targets?”
Silence is your answer. If nobody in the room can explain the downside protection, you don’t have a deal. You have a lottery ticket.
I always tell folks to push for these three things:
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A defined floor payment regardless of performance
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Clear operating covenants that protect your targets
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An acceleration clause tied to any change of control
You won’t always get all three. Get two and you’re doing better than most.
Keep Your Eyes Open
Look, earnouts aren’t evil. Used honestly, they bridge the gap between what you think your business is worth and what a buyer wants to risk. The trouble starts when the structure quietly shifts all the risk onto your side of the table.
So do the boring work. Read the fine print twice. Bring in your own advisor. And remember what happened to my buddy. He’s fine now, by the way. Started another company. This time he took the cash upfront and never looked back. 🎯
Your business built something real. Make sure the deal pays you for it.