Earn‑Outs When Selling a £1m–£10m Business

How to Maximise Your Price and Avoid Being Stitched Up with your earn out.

Many of the best deals I’ve completed over the last 15 years have included an element of performance‑based consideration, commonly called an earn‑out.

I know that makes many owners bristle. A lot of people tell me, “I don’t want an earn‑out, I just want my money on completion.” I understand that instinct. But the reality is this:

• Used in the right way, an earn‑out can maximise your sale price and get a deal done that otherwise wouldn’t happen.

• Used in the wrong way, it can kill the deal or quietly strip millions off the final proceeds you thought you’d secured.

Like most things in life, there’s a positive and a negative. I am a fan of earn‑outs as a tool to enhance the sale value, not as a lever to grind the price down. But sellers need to be alive to some of the sharper practices buyers (and their solicitors) try to build into the share purchase agreement (SPA).

What follows is not a definitive legal checklist. It’s a practical guide from someone who has sat across the table on £1m–£10m deals for years and seen how “little” earn‑out terms can completely change the economics of the deal.

1. What an earn‑out really is – in plain English

An earn‑out is simply this: You sell your company today, but some of the price is paid later, depending on how the business performs after completion.

For example:

• Headline price: £6m

• Paid on completion: £4m

• Earn‑out: up to £2m over 3 years, if agreed profit targets are met

The logic is straightforward:

• You think your business is worth £6m because you know what’s “in the pipeline”.

• The buyer worries they’re overpaying if those future plans don’t materialise.

• The earn‑out bridges that gap.

Done correctly, it aligns interests: you help deliver the growth, and you’re rewarded for it.

2. Why so many owners hate the idea and why they shouldn’t dismiss it

Owners typically dislike earn‑outs because they feel like:

• “I’m taking the risk while the buyer takes control.”

• “They can fiddle the numbers and wriggle out of paying me.”

• “If they mess it up, I lose, even though I’ve already sold.”

Those concerns are not paranoia. They’re based on very real examples. However, especially in the £1m–£10m deal range, earn‑outs are often:

• The only way to get a buyer up to the number you want

• A way to capture upside from growth you know is achievable

• A comfort for the buyer’s investment committee, making the deal more likely to be approved

The key point is this:

An earn‑out is not inherently bad. A badly drafted earn‑out is a problem.

The headline offer in the Heads of Terms may look fair. The real damage is often buried later in the SPA in the detailed earn‑out rules.

3. The two sides of earn‑outs

Potential positives:

• Higher overall headline price

• Ability to prove your business is worth what you say it is

• Better alignment with the buyer (if you are staying on)

• Often tax‑efficient compared with some forms of deferred consideration

Potential negatives:

• Loss of control while still carrying performance risk

• Complexity, easy to hide unfavourable terms in the fine print

• Dependence on the buyer’s behaviour and integration decisions

• Disputes, frustration, and in the worst cases, litigation

Your job as seller is not to avoid earn‑outs at all costs. It is to avoid being stitched up by the terms.

4. The top 10 “tricks” and unreasonable conditions I see in earn‑out clauses

Here are ten of the more common tactics and structures that can seriously hurt you. Some are sharp practice; some are just “buyer‑friendly” drafting that is not neutral at all.

1. Targets based on fantasy forecasts

The classic move: during negotiations the buyer nods along to your growth story, then bakes aggressive, hockey‑stick forecasts into the earn‑out targets.

Example: your business currently makes £1m EBITDA. A reasonable earn‑out might be structured around you maintaining £1m and growing to, say, £1.2m–£1.4m. Instead, the SPA suddenly requires:

• Year 1: £1.4m

• Year 2: £1.7m

• Year 3: £2.0m

…with all the earn‑out stacked into Year 3.

If those numbers are out of line with historic performance and realistic market conditions, you’re setting yourself up to miss and the buyer knows it.

2. Buyer given full control but no responsibility for earn‑out impact

You’ve sold, so the buyer is legally in charge. The trick is when the SPA lets them do whatever they like with no obligation to consider the earn‑out.

Examples:

• They can cut marketing, staff or key projects that drive growth.

• They can change pricing or product mix drastically.

• They can refuse to invest in essential kit or tech.

Yet your earn‑out is still judged on revenue or profit as if nothing has changed.

A fair earn‑out recognises that if the buyer is free to change the plan, they should not be able to do so in a way that deliberately or foreseeably undermines your earn‑out.

3. Loading central and “management” charges into your P&L

This is a favourite in private equity and larger corporate buyers:

• Before the sale, your business had a lean cost base.

• After the sale, the group starts pushing “management fees”, “group recharges”, “IT recharges”, “finance recharges” and similar costs into your company’s accounts.

Those extra costs erode profit and can destroy your earn‑out, even if revenue and gross margin are exactly as planned.

If your earn‑out is based on EBITDA or profit and the SPA doesn’t explicitly deal with this, you’re very exposed.

4. Including one‑off integration and restructuring costs in the earn‑out metrics

Another subtle one: the buyer decides to restructure, integrate systems, relocate offices, or make redundancies. All of those costs are run through your P&L.

Result: the year’s profit is hammered, and the earn‑out target is missed.

The buyer gets the long‑term benefit of the restructuring; you absorb the short‑term pain through a reduced earn‑out.

5. Freedom to move revenue, staff or contracts out of “your” business

The SPA allows the buyer to:

• Transfer key contracts to another group company

• Move sales staff or key account managers into a central team

• Reallocate marketing spend away from your brand to others in the group

On paper, the overall group may do well, but the legal entity or division used for the earn‑out underperforms. You lose out, even though “your” customers are still paying and “your” people are still generating value.

6. Earn‑out calculated on a widened “division” that includes loss‑makers

Sometimes the buyer wants to combine your business with a weaker division:

• The earn‑out metric is defined not just on your company, but on a “Business Unit”, “Division” or “Sub‑Group”.

• That unit may include other activities that are loss‑making or volatile.

In effect, your earn‑out depends not only on the performance of the company you built, but also on how well the buyer manages entirely separate operations.

7. Changing accounting policies mid‑stream

The SPA says the earn‑out will be calculated in accordance with the buyer’s accounting policies, as determined by the buyer (or their auditors).

That sounds reasonable on first reading, but:

• If the buyer changes policies mid‑earn‑out (e.g. revenue recognition, provisioning, capitalisation), it can depress reported profit.

• Without a clear requirement to be consistent with the pre‑completion basis, you have no baseline.

Small technical tweaks in accounting can easily swing the reported profit by hundreds of thousands in a £1m–£10m business.

8. Forfeiting the earn‑out if you leave – even if they make it impossible to stay

Another regular feature: you only get the earn‑out if you remain employed for the entire period. If you’re dismissed (for any reason) or you resign, you lose any future payments.

On its own, that might be reasonable for a key person. The problem is when:

• “Cause” for dismissal is defined ridiculously widely; or

• Your role is changed so drastically that any sensible person would leave; or

• You’re sidelined and effectively paid to sit at home, then dismissed conveniently before a large earn‑out payment is due.

In that scenario, the earn‑out becomes a behavioural handcuff, not a reward for performance.

9. Buyer’s “sole discretion” on adjustments and disputes

You will often see wording that says the buyer may, in its “sole discretion”, make such adjustments to the earn‑out calculation as it sees fit, or that the buyer’s calculations are “final and binding” unless you challenge them within an unreasonably short period.

Combine that with limited access to management accounts and no audit rights, and you are effectively told:

“Here is the number. Trust us.”

In a tight earn‑out, that can be worth hundreds of thousands to the buyer.

10. Broad set‑off rights against warranties and indemnities

Even if you hit every target perfectly, the SPA may allow the buyer to set off any alleged warranty or indemnity claim against the earn‑out payments – including claims that are disputed and not yet proven.

That means:

• Raise a claim (genuine or otherwise)

• Park it in the background

• Quietly net it off against the earn‑out so that cash never changes hands

You may eventually win the argument, but by then the money has effectively been retained by the buyer.

5. “No‑brainer” protections you should insist on

There is no such thing as a risk‑free earn‑out, but there are some basic protections that, in my view, should be treated as non‑negotiable unless there is a very good reason otherwise.

Here are a few to put firmly on your checklist.

A. Exclude group management and head office charges from the earn‑out

This one is crucial if the earn‑out is profit‑based.

You want wording along the lines of:

• No new group management charges, head office recharges, financing costs or similar overheads to be included in the earn‑out calculation, other than those agreed and specifically listed in the SPA (and ideally capped or benchmarked).

If nothing else, make sure any such charges are:

• Clearly defined

• Consistent with what you had historically

• Fixed or reasonable and not open‑ended
  

B. Protect your earn‑out if the buyer dismisses you

You should not lose your earn‑out simply because the buyer decides to move you on.

Key concepts to aim for:

• If you are dismissed without cause, your earn‑out should either:

  • continue as if you remained employed; or

  • crystallise based on a deemed target (for example, assuming budget is hit);

• If your role, responsibilities, location or remuneration are materially worsened, and you resign as a result, that should be treated in the same way as being dismissed without cause (sometimes called “good leaver” treatment).

The core idea: the buyer mustn’t be able to box you into a corner, push you out, and therefore avoid paying what you’ve earned.

C. Lock in consistent accounting policies

You want the earn‑out to be calculated:

• Using the same accounting policies and principles as the last set of pre‑completion accounts; and

• Only varied with your written consent, or in a way that is neutral to the earn‑out.

This is dry but vital. It stops the buyer “managing” profit down just by changing the way they report it.

D. Ordinary course of business and no deliberate earn‑out sabotage

There should be an obligation on the buyer to run the business:

• In the ordinary course, consistent with past practice

• Not to take actions with the primary purpose of reducing or avoiding the earn‑out payments

You won’t get absolute control, the buyer owns the company. But you can at least secure protection against obvious gamesmanship.

E. Information, transparency and audit rights

You should have:

• Regular (e.g. quarterly) management information on the business

• A clear timetable for the buyer to provide each earn‑out calculation

• A reasonable period to review and challenge the calculation

• A dispute mechanism involving an independent accountant if you cannot agree

Silence and opacity are where unfair adjustments hide. Shine some light on the numbers.

F. Protection if the buyer sells on or reorganises

If the buyer:

• Sells your company again, or

• Transfers the trade and assets to another group company, or

• Undertakes a major reorganisation

…you want the earn‑out to either:

• Crystallise (as if targets were met); or

• Be expressly assumed by the new owner on the same terms

Otherwise, your earn‑out can vanish in a corporate shuffle.

6. How owners in the £1m–£10m range should think about earn‑outs

For businesses in the £1m–£10m value bracket, a typical structure might look like:

• 60–80% of the price on completion

• 20–40% as an earn‑out over 2–3 years

Rough example:

• £5m headline

• £3.5m on completion

• £1.5m over 3 years, based on profit or revenue

Handled well, that extra £1.5m can be very achievable – especially if you have:

• A strong, recurring revenue base

• Clear growth drivers already in motion

• A buyer who can add genuine value (distribution, technology, capital)

Handled badly, you can find yourself three years later saying:

“On paper I sold for £5m. In reality I got £3.5m and a headache.”

The difference is almost never the headline offer in the Heads of Terms. It is the detail in the SPA, and how hard (or not) your advisers pushed on the earn‑out mechanics.

7. Practical advice before you sign anything

1. Treat the earn‑out schedule as core economics, not legal housekeeping.It deserves the same time, attention and negotiation as the initial price.

2. Model the downside, not just the upside.Ask your adviser to run realistic scenarios: “What if revenue is flat, not +20%? What if we miss Year 2?” Know exactly what you stand to gain and lose.

3. Interrogate the buyer’s intent.A good buyer, with nothing to hide, will be open to reasonable protections and consistent accounting. If they fight you on every point, draw your own conclusions.

4. Get corporate finance and legal advice from people who do owner‑managed deals regularly.This is not the place for a generalist. You need advisers who have seen these tricks before and know where to push.

5. Be prepared to walk away if the earn‑out terms are toxic.A slightly lower, cleaner, more certain deal is often better than a higher headline price loaded with risk and games.

8. Final thoughts

Earn‑outs are neither angel nor demon. In my experience:

• Some of the best exits I’ve worked on involved earn‑outs that paid out fully and took the seller beyond what they originally hoped.

• Some of the most disappointing stories came from owners who thought they had “shaken hands on a £X million deal”, only to see hundreds of thousands evaporate in the fine print.

If you are selling a business in the £1m–£10m range, assume an earn‑out will be on the table. Don’t reject the concept outright. Instead:

• Embrace the idea of being rewarded for performance

• Be absolutely ruthless about the detail

• Insist on clear, simple, fair rules that a sensible person can understand

Get that right, and the earn‑out can genuinely maximise your value. Get it wrong, and you’ll spend the next three years working for a price you’ll never actually see.

Call to action

If you are thinking about selling your business, or you are already in discussions and want help negotiating the price, earn‑out or other sale terms, get in contact. I specialise in exits for £1m–£10m owner‑managed businesses and can give you a clear, no‑nonsense view on whether the deal you’re being offered genuinely protects you and maximises your eventual payout.

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