Earnouts: how they work and how often they pay

How an earnout works

The purchase agreement sets one or more targets, such as revenue, EBITDA, or a census or visit count, over a measurement period that commonly runs one to three years. If the targets are hit, you receive additional payments; if they are partly hit, the agreement may pay a portion; if they are missed, nothing more is owed.

Because the buyer controls the business after closing, the details matter as much as the headline number: how the metric is calculated, which costs the buyer can allocate to your business, and what the buyer must do, or may not do, to support the targets.

Terms worth negotiating

If an earnout is part of the deal, these points do the most to protect you.

A metric you can see

Revenue or visits are easier to verify than EBITDA, which a buyer's cost allocations can move.

Operating covenants

Commitments on staffing, payer contracts, and how the business is run during the earnout period.

Partial payment

A sliding scale rather than all-or-nothing, so a near miss still pays something.

Acceleration

Full payment if the buyer sells the business or breaches its obligations before the period ends.

Information rights

Regular reports and the right to review the calculation.

A healthcare-specific caution

Earnout targets in healthcare deals must not reward referrals between the buyer and seller. Metrics tied to the volume or value of referrals can raise federal and state fraud and abuse issues. Counsel on both sides will usually structure targets around the practice's own performance for that reason.

What the data says about earnout payouts

SRS Acquiom tracks how earnouts actually perform. Outside life sciences, 59 percent of deals with an earnout paid some amount, but only 21 percent of the maximum potential earnout dollars were paid overall. Deals that achieved at least some payout typically paid about 50 cents on the dollar.

Smaller deals fare worse. Lower middle-market deals, with upfront value of $50 million or less, include earnouts more often and tie a larger share of value to them, and those with any achievement paid a median of 43 cents on the dollar, compared with 67 cents for larger deals. Most home care and behavioral health practice sales fall in that smaller category.

Earnout checklist for sellers

Before agreeing to an earnout, make sure the agreement answers each of these.

How Lartico fits in

Lartico introduces you to several buyers at once, which lets you compare how much each one pays at closing versus through an earnout. Competition is the most reliable way to shift value from contingent to guaranteed.