I have sat on the buy side of more than thirty acquisitions with our own group's capital, which means I have been the person drafting these clauses as well as the person negotiating against them. Let me walk you through what an earn-out really is, what the data says about how they pay out, and the handful of protections that decide whether yours arrives.
Why an earn-out exists at all
Start with a deal we see every month. Your business makes £800,000 of profit and you want £5 million for it. The buyer believes the profit, but not the growth story, and offers £4 million. Neither of you will move. So the deal is signed at £4 million in cash on completion, plus up to a further £1 million over the next two years if profit stays where you say it will. You tell people you sold for £5 million. The buyer's board approved £4 million. The last million is the earn-out, and which of you turns out to be right about it is what the rest of this article is about.
That is every earn-out in miniature. You believe next year looks like this year or better. The buyer is not willing to pay for that belief today. Rather than walk away, both sides split the difference: you get the price you wanted if the business performs, and the buyer only pays for growth once it actually shows up.
So be clear about what the clause is. An earn-out is not a bonus for good behaviour after completion. It is deferred purchase price, contingent on the thing the buyer was not confident enough to pay for up front. If you would not have sold at the cash-only price, the earn-out is doing real work in your deal. If you would have, ask yourself why you are carrying the risk of the contingent piece at all.
The number to hold in your head: 21p in the pound
The most useful data on how earn-outs actually pay out comes from the United States, where SRS Acquiom tracks thousands of private deals through the payment process itself rather than through press releases. I use their numbers because nothing of that quality exists for the UK; the mechanics of the clauses are the same, and what we see across our own market is consistent with the pattern.
The pattern is this. The median earn-out pays out at roughly 21p for every pound of its theoretical maximum. Somewhere between a quarter and a third pay nothing at all. On the deal above, that £1 million bridge is worth about £210,000 to the median seller - and for one seller in four, nothing.
Read that again before you sign anything. Both sides agree an earn-out believing the target is achievable, and on average the seller collects about a fifth of the number in the agreement. Some of that is genuine underperformance. Some of it is a target that was harder to hit than either side realised. And a meaningful share is what I would call accounting drift: once your business sits inside someone else's group, its numbers get measured by their choices, and those choices can quietly starve the figure your earn-out depends on.
The takeaway is not "never agree an earn-out." Often it is the only bridge that gets a good deal done, and a well-built one beats walking away. The takeaway is: decide whether the deal works for you on the guaranteed cash alone, treat the earn-out as upside, and spend your negotiating effort on the protections below. They are what move you from 21p towards the number you signed for.
The metric is most of the argument
The single biggest decision in any earn-out is which number it is tied to.
Revenue is the cleanest metric from your side of the table. It is harder to move with accounting judgement, and a buyer cannot starve it by reallocating costs. Its weakness is that it says nothing about profit, so buyers resist it.
Profit measures, usually EBITDA, are what buyers push for, and they are where most disputes live. EBITDA depends on dozens of judgement calls: how group overhead gets allocated to your business, what counts as one-off, what gets capitalised. After completion, every one of those calls belongs to the buyer. In the SRS Acquiom data, arguments about how the number was calculated are the largest single category of earn-out dispute, by a wide margin.
A blend is increasingly common: revenue plus a quality measure such as customer retention. Two metrics are harder to game than one, in either direction, and a blend usually gives a fairer answer to the only question that matters: is the business doing what both sides believed it would?
If you have negotiating room, push for revenue. If EBITDA is unavoidable, insist the calculation uses the same accounting policies your business used in the year before completion, unchanged without your written consent. That one sentence closes off most of the ways a profit number drifts against you.
What actually protects you
Five clauses do most of the work.
An express operating covenant. Not "the buyer will act in good faith" - that is a hope, not a right. In writing: the buyer will run the business consistent with the year before completion, specifically on sales effort, customer relationships and spending in the areas that drive your metric.
Audit rights with a named independent accountant. "Reasonable access to records" means whatever the buyer decides it means. Name the firm, fix the timetable.
The accounting policy lock. Same policies, same basis, as the year before completion. Changes need your consent.
Acceleration on a change of control. If the buyer sells the business, floats it, or is bought themselves during your earn-out period, you are paid out in full at that point. Without this, your earn-out disappears into someone else's balance sheet.
A sliding scale, not a cliff. A cliff pays everything or nothing either side of one line, which is an invitation to fight over that line. A scale pays something for a near miss. Fairer, and far less likely to end in a dispute.
The tax trap nobody mentions until it bites
This is the section that applies specifically to UK sellers, and it is the part I see missed most often.
First, you can be taxed before you are paid. If your earn-out has no fixed maximum that is certain to be paid, HMRC treats the right to future payments as an asset you received at completion, values it, and taxes you on that estimate up front. This has been the law since a case called Marren v Ingles in 1980. If the earn-out later pays less than the estimate, you are into claiming relief after the event. Cash flow and tax can be badly out of step, and you need to know that before you agree the structure, not in January when the bill arrives.
Second, Business Asset Disposal Relief usually does not follow the earn-out. The 18 per cent rate on your first million of qualifying gain applies to the sale itself. The later earn-out payments are typically treated as disposing of a different asset - the right to be paid - and that right does not normally qualify. Money you mentally taxed at 18 per cent can arrive taxed at 24.
Third, and most expensive: if the earn-out looks like payment for staying employed rather than payment for your shares, HMRC can treat it as employment income. That is the difference between capital gains tax at 24 per cent and income tax plus National Insurance at up to 47 per cent, with an employer's bill on top. The danger signs are well known: an earn-out you forfeit if you leave, one linked to your personal targets rather than the business's, one that looks generous next to your salary. This is entirely a question of how the deal is structured, which means it is entirely fixable - before signing.
None of this is a reason to refuse an earn-out. It is a reason to have the tax conversation at the same time as the price conversation, because by the time the mechanic is agreed, the tax outcome usually is too.
What I watch from the buyer's chair
Having administered these clauses from the other side, I can tell you what actually causes the trouble. It is almost never bad faith. It is that nobody wrote down, precisely, how the number would be calculated - and eighteen months later, two honest people can produce two different answers from the same business, several hundred thousand pounds apart.
As a buyer, I want the mechanic boringly precise for the same reason you should: a dispute costs both sides more than the clause was worth. When the buyer across the table resists precision, that tells you something worth knowing before you sign.
Where we come in
We structure and negotiate earn-outs from both sides of the table, and we run our own group's acquisitions, where we set these terms ourselves. That means we know which protections are standard, which are negotiable, and which ones buyers quietly hope you will not ask for. If an earn-out has landed on your desk, or one is likely in a negotiation ahead, the time to take advice is before the mechanic is agreed - not after the first quarter's number comes in low.
Frequently asked questions
Is an earn-out a good sign or a bad sign in a deal?
Neither on its own. It means the buyer is not fully confident in the numbers you are presenting, and the earn-out is how you get paid for being right. What matters is not that an earn-out exists but whether the metric, the protections and the tax treatment are fair.
What is the single most important clause to get right?
The metric. Revenue is harder to manipulate than profit. If a profit measure is unavoidable, the accounting policy lock does more to protect you than anything else you can negotiate.
How likely am I to receive the full earn-out?
Less likely than you expect. The best available data puts the median payout at about 21p for every pound of theoretical maximum, with a quarter to a third paying nothing. Judge the deal on the certain cash; treat the earn-out as upside.
Should I stay on during the earn-out period?
Operationally it helps: sellers who stay close to the business spot calculation problems while they are still fixable. But take advice on how your staying is papered, because an earn-out that is conditional on your employment risks being taxed as income at up to 47 per cent rather than as capital at 24. The structure decides.
What happens if the buyer is bought during my earn-out period?
Whatever your agreement says - and nothing more. Without an acceleration clause covering a sale, a listing or a change of control, your earn-out can vanish into the new owner's numbers with no practical way to chase it. Negotiate it before signing; it cannot be added after.
How is an earn-out taxed in the UK?
It depends entirely on structure. You can be taxed up front on an estimate of payments you have not yet received; the later payments often fall outside Business Asset Disposal Relief; and an earn-out tied to your continued employment can be taxed as income rather than capital. The gap between a well-structured and badly structured earn-out can be a double-digit percentage of the money. Take advice before the mechanic is fixed.