Selling a business is one of the biggest decisions you’ll make as a founder. It’s not just about the financial outcome, it’s about the legacy you’ve built, the people you’ve led, and the future of the company you’ve nurtured from the ground up. That’s why structuring a sale in a way that protects your interests and sets your business up for long-term success is so important.
One term that often causes hesitation or confusion during the sale process is an earnout. Earnouts are sometimes misunderstood as complex or risky. However, when structured thoughtfully, an earnout can create alignment, drive higher overall value, and make the transition smoother for both the buyer and the seller.
Let’s break down what an earnout really is, why they’re used, and how to approach them strategically, and debunk some common myths along the way.
At its core, an earnout is a portion of the sale price that is contingent on future performance. Instead of paying the full purchase price upfront, the buyer agrees to pay an initial amount at closing, with additional payments (“earnouts”) based on the business achieving certain performance targets over a defined period of time.
Earnouts are especially common for businesses with high growth potential, allowing sellers to be rewarded for the company’s continued success over time.
There’s a reason earnouts are widely used in technology acquisitions — they align incentives between the buyer and the seller, creating a more balanced and fair transaction.
Earnouts allow buyers to justify a higher total valuation because part of the payment is tied to future success. This creates a structure where sellers are compensated not just for where the business is today, but also for where it’s going.
Instead of settling for a conservative, all-cash offer, an earnout allows sellers to participate in future growth and maximize the total value of the deal.
From a buyer’s perspective, earnouts help reduce uncertainty. For sellers, it demonstrates confidence in the business’s future, which can be a powerful signal to the buyer that you’ve built something sustainable.
If you believe in the business’s future performance, an earnout is a strategic way to show it while also driving higher overall value.
Earnouts help smooth the transition period because both parties remain invested in the success of the business. Buyers are more likely to provide the resources and support needed to hit performance targets, and sellers remain motivated to ensure a successful handoff.
When incentives are aligned, the transition tends to be more collaborative and productive.
Despite the advantages, earnouts are sometimes viewed with skepticism due to misconceptions or poor structuring. Here are the most common myths about earnouts:
Reality: Earnouts aren’t about uncertainty, they’re about alignment. In fact, buyers are more likely to use earnouts when they see significant upside potential and want to reward future growth. A well-structured earnout signals confidence, not hesitation.
Reality: While earnouts introduce variability in final payouts, that’s not necessarily a negative. When structured correctly, with clear and achievable targets, an earnout allows you to benefit from future success without taking on operational risk.
The key is to define realistic performance targets and ensure that both parties are aligned on expectations from the start.
Reality: If the incentives are properly aligned, Buyers view earnouts as a win-win scenario, benefiting both themselves and sellers. They actively support strong post-sale performance, empowering sellers to fully realize their earnout potential.
Earnouts rely on clarity, alignment, and fairness. Make sure you set clear, measurable, and achievable targets that can be met in a reasonable timeline. Most earn outs typically last between 1–3 years.
Above all, trust is the foundation of a successful earnout. If you have confidence in your financial performance and your acquisition partner, you will be well positioned for a rewarding outcome
An earnout, when structured properly, isn’t something to fear, it’s an opportunity. It allows you to unlock the full value of your business while ensuring that the future success you’ve worked so hard to build translates into the right financial outcome.
At Perseus Group, we’ve seen how a well-designed earnout can create a win-win scenario for founders, for employees, and for the long-term health of the business. If you’re considering selling your technology business, understanding earnouts is a powerful tool for maximizing value and ensuring a smooth transition.
Explore the latest news, insights, and articles from our vertical market investors and operators.
.png){kind=small}
