Got An Earn-Out?

Got An Earn-Out?

Got An Earn-Out?

In Mergers & Acquisitions, Earn-Outs Can Be Beneficial — But Also Come With Risk
By Kathryn K. Meier, Esq.
Hoge, Fenton, Jones & Appel, Inc.

What is an earn-out? An earn-out is an arrangement that requires the buyer of a business to pay the seller additional consideration if the business performs as specified after the closing. It can be useful in bridging a gap between the seller’s and buyer’s perception of the value of the business. For example, if the seller believes his business is worth $10 million and the buyer believes it is worth $8 million, they could settle on an initial sale price of $8 million. The earn-out would provide the seller with an additional $2 million if the business performs as the seller believes it will after the sale.

Deciding on a basis for the earn-out. A threshold question is whether to base the earn-out on post-closing revenue, earnings, or other criteria. Basing it on revenue eliminates certain accounting issues, so both the buyer and the seller might prefer it. The buyer must consider, however, whether revenue is really an adequate measure of a business’s value.

Use caution! Earn-outs can be an invitation to litigation, so use them with caution. When earn-out provisions lead to disputes it is usually because the parties failed to account adequately for the many factors that can influence the earn-out calculation. For example, the parties should specify the applicable accounting principles. While the use of generally accepted accounting principles is common, the parties might want to deviate from GAAP if one of them has deviated from GAAP in preparing its financial statements. The parties must consider whether to subtract such items as returns, allowances, shipping costs, import and export duties, and sales tax in calculating “revenue.” If earnings will be the basis for the earn-out, the parties should consider whether it is appropriate to deduct interest, taxes, depreciation, and/or amortization.

Other things to consider in calculating earn-outs. The following factors also can influence the calculation of revenue and earnings:

Post-closing sales of products or services at reduced prices by the target to the buyer (if the target continues as a separate legal entity after the closing) or the buyer’s affiliates
Bundling of the seller’s products with other products without a proper price allocation
Whether the seller will support the business after the closing with appropriate funding for labor, equipment, tooling, marketing, etc. to enable the business to generate the anticipated revenue
Whether, in the case of an earn-out based on earnings rather than revenue, the buyer will:
make expenditures that the seller believes unfairly impact earnings during the earn-out period (such as expenditures for long term research & development ), or
improperly allocate centralized or administrative costs among its various subsidiaries or divisions, including the acquired business.
What happens if…? Parties to mergers and acquisitions sometimes fail to take into account other important factors that can affect the ultimate earn-out. For example, what if the buyer sells the acquired business? What if the buyer merges the acquired business entity with another entity? What if the acquired business is integrated into the buyer’s other operations so that the revenue and earnings cannot be readily traced? What if the buyer discontinues a product line of the acquired business? If the seller expects to influence post-closing revenue and/or earnings as an employee of or consultant to the buyer, what happens if the seller dies, becomes disabled, or is terminated by the buyer? The earn-out formula should account for these possibilities.

Finally, the seller should have the right to inspect the buyer’s post-closing financial records. It should consider the impact that the earn-out will have on its ability to structure the transaction as a tax-free reorganization, or to use the installment method in reporting the gain on the sale.

What should businesses do? An earn-out can be a useful tool in concluding an acquisition. It comes with some risk, however, so knowledgeable and careful legal drafting is critical to protecting your interests.

Kathryn K. Meier frequently conducts workshops for businesses and professional organizations on a variety of topics in the employment law area, including wrongful termination, proprietary agreements, wage and hour compliance, and sexual harassment. Ms. Meier advises her clients on all aspects of human resources issues from pre-hiring through termination of employees. She is an active member of the Santa Clara County Bar Association, and previously served as its President in 1994.


We hope you found this article about “Got An Earn-Out?” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or website

To receive our free newsletter, contact us here.

Subscribe to our YouTube Channel for more updates.

Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

Alan L. Olsen, CPA, Wikipedia Bio is a proud sponsor of The American Dreams Show.



The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

Untitled_Artwork copy 4 (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

Posted in
Five Great Reasons to Attend Venture Capital Seminar 2 of 6

Five Great Reasons to Attend Venture Capital Seminar 2 of 6

Impact Venture Capital & GROCO’s “Venture Vision” Seminar 2 of 6 (To register FREE, click here.) This free online instructional seminar on January 11, 2023, at 10 AM is an excellent opportunity to learn more about the risks and rewards associated with venture capital (VC) investments. By covering topics such as the stages of funding,…

Mastering Comprehensive Financial Planning with Bill Gombert

Mastering Comprehensive Financial Planning with Bill Gombert

Introduction: In this interview, Alan Olsen, CPA and featured guest Bill Gombert discuss comprehensive financial planning and much more. Transcript: Alan Olsen Hi, this is Alan Olsen and welcome to American Dreams. My guest today is Bill Gombert. Bill, welcome to today’s show. Bill Gombert Thank you very much pleasure to be here. Alan Olsen So, Bill, you’re…

Building Conscious Communities with Brett Kaufman

Building Amazing Conscious Communities with Brett Kaufman

Introduction: In this interview, Alan Olsen, CPA and featured guest Brett Kaufman discuss Building Conscious Communities and much more. This Transcript of Alan and Brett’s discussion of conscious community building has been generated by software and may have inaccuracies: Alan Olsen So Brett in our segments here in American Dreams, we talked about pathways of life and things…

5 reasons to attend free venture capital seminar 2 of 6

Unveiling the Venture Vision: 12 Insights from the Frontline Capital

Insights Into Venture Capital Investing From Seminar 1 of 6 (To register for seminar 2 of 6 FREE, click here.) “In an era where financial landscapes are constantly being reshaped, it’s crucial for investors to stay ahead of the curve. The Venture Vision Webinar, a joint initiative by GROCO and Impact Venture Capital, recently hosted…