An earn-out links part of the price to something measurable after the sale completes. That could be revenue, profit, EBITDA, customer renewals, annual recurring revenue (ARR) or something more specific to your business, such as the rollout of a particular product, service or contract. There is no default rule in UK law. You and the buyer have to agree the definition and the calculation, and it needs to be written in a way that leaves no room for competing interpretations.
From your side, the key question is whether the chosen metric is something you can genuinely influence. If the buyer will take over all day-to-day decisions, you need to think through how that affects your ability to meet the targets.
Why Sellers Agree to Earn-Outs
Sellers sometimes accept earn-outs because they want to capture value that isn’t reflected in historic financials. You might be on the verge of a large client win or expecting a strong growth period. An earn-out can bridge that gap when the buyer is not yet comfortable paying the higher price up front.
There is nothing wrong with this, but you need to understand the practical reality: once the deal completes, the buyer controls the resources, the strategy and the priorities. If those shift, your earn-out may become harder to achieve even if the business itself is doing reasonably well.
Choosing the Right Performance Target
This is the point that makes or breaks an earn-out. If the target depends on decisions the buyer controls, you need contractual protections that stop the buyer from undermining the outcome. For example:
- Revenue-based earn-outs often need stability around pricing, sales channels, marketing activity or customer allocation.
- Profit-based earn-outs may need limits on group charges, management fees or unilateral cost increases imposed by the buyer.
- Milestone earn-outs need clarity on how success will be measured and who has authority over the relevant project.
You should talk openly with the buyer about what the business will look like the day after completion. Earn-outs become difficult when the buyer plans rapid changes but the seller expects continuity.
How Long Should the Earn-Out Last?
Most earn-outs run for one or two years, sometimes longer in sectors with longer sales cycles. A longer period can give a more balanced view of the business, but it also increases the number of variables outside your control. You should also think about your own plans. If you want a clean exit after a short transition, a long earn-out may not suit you, especially if you are expected to stay involved.
Your employment or consultancy agreement should align with the earn-out period. It is quite common to see agreements that place obligations on you for a shorter period than the earn-out itself, which creates uncertainty about your entitlement if you leave or are asked to step aside. This is the sort of point you should resolve before signing.
The Calculation: Where Most Disputes Come From
Earn-out drafting often looks neat on day one, but becomes much harder to apply in real time. You should think about how the business actually operates and make sure the calculation reflects that. The following areas often cause friction:
Accounting treatment
If the buyer uses different accounting policies from those used historically (uses a different definition of ARR for example), your earn-out may shift simply because entries are recognised differently. The agreement should specify the accounting basis, not leave it to interpretation.
Treatment of extraordinary or buyer-imposed costs
Buyers sometimes introduce new systems, restructure teams or carry out integrations shortly after completion. Those costs can weaken profitability unless you agree in advance that they will be excluded or adjusted.
Group charges
If the buyer has a larger group, central functions may allocate costs to the acquired company. You should agree parameters around how those charges will work, otherwise the earn-out figure can be affected even when the trading performance is solid.
Timing of revenue
In subscription, SaaS or staged-delivery businesses, you should make sure the parties use the same approach to recognising revenue streams such as annual recurring revenue (ARR). Even small differences can create disputes.
These issues are not theoretical. They appear regularly in post-completion negotiations, and they are avoidable if the drafting is clear.
What the Buyer Can and Cannot Do
Under English law, the buyer is not automatically required to run the business in a way that helps you achieve the earn-out, and there is no general implied duty to maximise your payment. In some cases, the courts may imply a limited duty to exercise contractual discretion rationally, but that is not the same as an obligation to protect your earn-out. In practice, any protection you need should be written expressly into the contract.
Sellers sometimes negotiate restrictions such as:
- Not diverting business to other group companies
- Not making material strategic changes without consultation
- Not reallocating key staff
- Not discontinuing core products or services during the earn-out period
These points vary depending on the size of the deal and the buyer’s plans. The aim is not to control the buyer’s management decisions, but to avoid actions that would make the earn-out pointless.
How the Earn-Out Should Be Paid
You may prefer more than one payment point instead of a single payment at the end of the period. Multiple checkpoints can give you earlier clarity and help identify disagreements sooner. Buyers sometimes prefer a single payment for administrative reasons. It really depends on how predictable your business is and how long the earn-out lasts.
Whatever the structure, you should make sure the agreement sets out when payments will be made, what information the buyer must provide to support the calculation and the process for resolving disagreements.
Tax Considerations
Earn-outs have specific tax rules. For a UK-resident individual seller, they are usually treated as part of the consideration for the sale of shares, so they fall within capital gains tax. The timing and amount of tax depend on how the earn-out is structured and whether the right to future payments is ‘ascertainable’ at completion.
If part of the earn-out is linked to your continued employment, there is a risk that HMRC may treat some payments as employment income. This is why you should take tax advice before agreeing on the final structure.
What Happens if the Buyer Sells the Business Before Your Earn-Out Ends?
This is another point that sellers overlook. If the buyer sells the company, you need clarity on whether:
- The earn-out accelerates,
- You receive a replacement payment based on assumed performance, or
- Your entitlement moves to the new owner.
If the agreement is silent, you may find yourself relying on the goodwill of a new buyer who has no relationship with you. This is unlikely to produce a good outcome, so it is worth addressing from the outset.
Getting the Right Support
An earn-out can help you reach a higher price or complete a deal that would otherwise stall, but it brings a degree of uncertainty.
We help sellers work through the practicalities, negotiate protections and spot the hidden risks that only tend to appear later. Once you understand what the buyer is proposing and how the calculation will work, you can negotiate from a far stronger position.
At JPP Law, we have experience working with sales that involve earn-outs of all shapes and sizes. We help you understand the implications, negotiate the terms and avoid the common pitfalls that reduce value. Our job is to make sure the agreement reflects what you think you are signing up to, not something very different.
How JPP Law Can Help
If you are planning a sale or want guidance on an earn-out you have been offered, we would be happy to talk you through your options. To speak with one of our commercial solicitors, contact JPP Law today.
