Earn-outs explained: how they affect what you walk away with
An earn-out is the part of your sale price that is paid after closing as the practice continues to perform. The buyer pays a portion at closing and the rest over time, tied to targets for keeping clients, revenue or assets and growing the practice. Done well, an earn-out puts you and your buyer on the same side: both of you are working toward a practice that keeps growing after the transition. What you walk away with is the closing consideration plus the earn-out you achieve, and for sellers who choose the right partner, that second piece can be a meaningful part of the total.
Why earn-outs work for so many sellers
Every deal we advise on includes an earn-out, and in our experience many teams hit their targets. A big reason is who they choose to partner with. Buyers that bring added services, staff, technology, and client support give the practice more capacity to grow than it had on its own. When the seller's relationships are combined with the buyer's resources, the targets become a natural result of a stronger business rather than a stretch.
How an earn-out is put together
Total deal consideration is usually made up of three pieces, and each one can be paid in cash, in equity in the buying firm, or in a mix of the two.
- Closing consideration: what you receive when the deal closes.
- Retention earn-out: paid when an agreed share of your clients, revenue, or assets stays with the practice through the transition. This is often a single payment, measured once after closing.
- Growth (performance) earn-out: paid when the practice grows beyond an agreed baseline. This can often be negotiated to be paid in more than one installment, for example at 24 months and again at 36 months, so you have more than one opportunity to earn it.
Both earn-outs are measured against a baseline that you and the buyer agree on before signing.
The targets are the heart of each earn-out, so it pays to understand them well. A retention target measures what stays with the practice, and a growth target measures what is added. Either one may be based on revenue, AUM, or specific clients, and each of those works differently. Before you agree to any number, get the exact definition in writing. Ask what counts as revenue, whether market moves count toward AUM, how clients who leave for reasons outside your control are treated, and who handles the final calculation. Clear definitions up front mean both sides know exactly how success will be measured, and they keep the earn-out period focused on growing the practice.
Read the headline number with the targets in mind. Our own offer summaries note that the potential offer value assumes all transition, retention, and growth expectations are met. That is the transparent way to present an earn-out: the headline shows the full value available when targets are achieved. When you compare two offers, look at the closing consideration, the retention earn-out, and the growth earn-out separately, along with how much of each is cash versus equity, and weigh how well each buyer is positioned to help you reach its targets.
How to work out what you will actually take home
A simple framework helps. Start with the closing consideration and add any earn-out amount you would receive even if targets were missed. That is your floor. Then add the full retention and growth earn-outs, which gives you your ceiling. Where you land between the two depends on the targets and on the support behind you, and knowing both numbers ahead of time lets you go into the deal with confidence.
Next, think about what drives the targets. If the earn-out depends on clients you will continue serving, your relationships carry a lot of weight. If it also depends on the buyer's integration, staffing, or marketing after closing, the quality of that support matters just as much. Strong partnerships put these commitments in writing: a clear list of what the buyer will keep in place, regular reporting so you can see results as they come in, and a defined process if the buyer changes how the business is run.
- Closing payment: the amount you receive at closing.
- Floor: closing payment plus any earn-out amount paid even if targets are missed.
- Ceiling: closing payment plus the full retention and growth earn-outs.
- Your realistic range: between the floor and the ceiling, shaped by the targets, your client relationships, and the support your buyer provides.
Also check whether you will stay on during the earn-out period, and for how long. A transition period is often what helps clients stay and grow with the new firm, so it can work in your favor. Make sure you understand your compensation during that time and how it fits together with the deferred payment, so the full picture matches your goals.
What to ask for before you sign
Ask for the full calculation in a worked example, using your own numbers. If part of the consideration is equity, ask how it is valued and when you can sell it. Ask how each earn-out is paid if the buyer is sold or merges during the period. Ask what happens if you become ill, retire early, or the buyer decides to stop serving a segment of your clients. Good buyers welcome these questions and answer them directly, and their answers are a useful way to gauge the partnership you are entering.
If you are weighing an earn-out against a different structure, it helps to get an independent read on what each version is worth to you. You can start with a market valuation of your practice, which gives you a directional range to measure offers against. If you would rather talk through the structure with someone who has seen these terms many times, you can request a consultation and we will walk through your options.
The short version is this: an earn-out rewards the growth you and your new partner build together. Know your floor and your ceiling, get the targets defined in full before you sign, and choose a partner with the services and support to help you reach them. That is how you get the most from what you walk away with.
Photo by Sebastian Herrmann via Unsplash