In issue #4 we showed that 24% of closed deals carry an earnout, median 34% of the closing payment. Here's the part that changes how you should treat one: earnouts are on the way out. The ABA's 2025 Private Target M&A Deal Points Study — the reference every deal lawyer uses — found earnouts in just 18% of deals, down from 26% two years earlier. The reason is simple: as valuation gaps narrowed, buyers and sellers didn't need a bridge as often. So when a buyer still insists on a large earnout, read it as a statement about how confident they are in your numbers — and negotiate accordingly.
Because when earnouts do happen, sellers collect far less than the headline. Across the deals SRS Acquiom administers, sellers collect only about 21 cents on each dollar of potential earnout. Only 59% pay out anything at all; even among those that do, about half the maximum is reached; 1 in 6 of the payers had to renegotiate to avoid litigation; and more than 1 in 4 earnouts end up contested. That gap isn't bad luck — it's structural. After closing, the buyer owns the business, sets the budget, and decides how shared costs get allocated to your P&L. The metric you agreed to is now theirs to influence.
Three choices, all set at the LOI, decide whether you collect:
| Choice | What sellers often accept | What actually protects you |
|---|---|---|
| The metric | An EBITDA target — which the buyer can shrink by loading in overhead, new hires, and allocated corporate costs | A revenue target — far harder to manipulate. 69% of earnouts already use revenue for exactly this reason. |
| The period | 3 years — a long tail of risk you don't control | 12–18 months — collect while the business you built is still the business being measured |
| The efforts standard | Buyer runs the business in its "sole discretion" or "good faith" — near-impossible to enforce | Specific affirmative covenants: maintain the sales team, don't reallocate shared costs, operate consistent with past practice |
That third row is where earnouts are won or lost. Recent Delaware cases (2024–2026) turn on the precise wording of the buyer's operating obligation. Where the contract says "sole discretion," sellers rarely recover. Where it names specific commitments, they do — in one 2026 case (Fortis v. Krafton), the buyer's own internal chat logs became the evidence that its conduct was pretextual. The paper trail matters, but only if the covenant gave you something to enforce in the first place.
And the leverage to get a cleaner structure comes from the same place a higher price does — competition. A lone buyer who knows you have no alternative writes the earnout in their favor. Multiple buyers at the table means the structure is negotiable, not dictated (more on that in our note on why one buyer is the most expensive way to sell).
An earnout isn't a bonus on top of your price. It's the part of your price the buyer gets to grade — after they own the pencil. Structure it so you're not being graded by the one person who benefits from a low mark.
If your LOI has an earnout, pressure-test three lines before you sign: the metric (revenue is far harder to manipulate than EBITDA), the period (12–18 months beats 3 years), and the efforts standard (specific affirmative covenants, never the buyer's "sole discretion"). If any of the three favors the buyer, the earnout is worth materially less than its headline number.
Have an LOI with an earnout — or a buyer signaling they want one? Send it over. We'll show you where the collectibility risk is hiding, and exactly what to renegotiate on the metric, the period, and the covenants before you sign.
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