Earnouts Are Back: How Deal Structures Are Adapting to Market Uncertainty

The number of M&A transactions that include earnout provisions has increased notably in the first quarter of 2026, according to data from multiple deal advisory firms and legal practices tracking transaction terms. This is not a coincidence. When buyers and sellers cannot agree on what a business is worth today, they structure part of the price around what it will be worth tomorrow. And in a market defined by tariff uncertainty, shifting interest rate expectations, and sharp sector divergence, that gap between buyer and seller expectations has widened.

Earnouts (provisions that tie a portion of the purchase price to the target company's future performance) have always been a tool in the M&A toolkit. What distinguishes their current resurgence is the breadth of their application. They are appearing not just in early-stage or high-growth company sales where future performance is inherently uncertain, but in mature middle market transactions where the uncertainty is driven by external factors: trade policy, energy costs, and the cost of capital.

Why the Valuation Gap Has Widened

Several forces are pulling buyer and seller expectations apart. On the seller side, business owners have watched valuations climb through 2024 and 2025, with global M&A deal value reaching $2.6 trillion in 2025, a 28% year-over-year increase. Many sellers have internalized these peak-market data points as their baseline expectation for what their company should be worth.

On the buyer side, the picture looks different. The Federal Reserve has held rates at 3.5% to 3.75%, and futures markets are now pricing zero rate cuts for the remainder of 2026. For leveraged buyers, this means higher financing costs and lower leverage capacity, which directly reduces what they can pay. A business that penciled at an 8x EBITDA enterprise value when a buyer could lever at 5x now pencils at 7x to 7.5x when leverage drops to 4x to 4.5x.

Tariff uncertainty adds another variable. For businesses with supply chains exposed to affected trade corridors, buyers are struggling to model forward margins with confidence. A manufacturer whose input costs could change by 10% to 25% depending on the next round of trade policy decisions represents a pricing challenge that traditional valuation approaches handle poorly.

How Earnouts Work in Practice

An earnout structures part of the purchase price as a contingent payment tied to the business achieving specified financial targets after closing. Common metrics include revenue, EBITDA, gross profit, or customer retention rates, measured over a defined period (typically one to three years).

For example, in a $50 million transaction, the buyer might pay $40 million at closing and an additional $10 million over two years, contingent on the business maintaining EBITDA above a specified threshold. If the business meets or exceeds the target, the seller receives the full $50 million. If it falls short, the seller receives less. The specific terms, including the metric, the measurement period, the threshold levels, and how disputes are resolved, are negotiated as part of the purchase agreement.

The appeal for buyers is clear: they pay less upfront and shift some of the valuation risk to the seller. The appeal for sellers is that they can achieve their target valuation if the business performs as expected, rather than accepting a discounted price that reflects the buyer's worst-case scenario.

The pitfalls are equally real. Earnout disputes are among the most common sources of post-closing litigation in M&A transactions. Disagreements typically arise over how the acquired business is operated during the measurement period (a buyer might make investments or changes that temporarily reduce EBITDA), how the earnout metrics are calculated, or whether the buyer has acted in good faith to support the business's ability to meet its targets.

Beyond Earnouts: Other Structural Adaptations

Earnouts are the most visible structural adaptation, but they are not the only one. Several other deal mechanics are gaining traction in the current environment.

Completion accounts are replacing locked-box mechanisms in a growing number of transactions. In a locked-box deal, the purchase price is fixed based on a set of reference accounts prepared at a specified date before closing, with no post-closing adjustment. In a completion accounts deal, the price adjusts after closing based on the target's actual financial position at the time of completion. Given the pace at which tariffs, energy costs, and other variables are shifting, buyers are insisting on the flexibility to adjust the price for changes that occur between signing and closing.

Seller financing is also reappearing in middle market transactions. When bank lending is constrained and buyers face higher borrowing costs, sellers who are willing to finance a portion of the purchase price (typically 10% to 20%) can facilitate deals that might otherwise stall. The seller receives a note from the buyer, usually with a term of three to five years and an interest rate that reflects the risk, providing ongoing income while enabling the transaction to proceed.

Protecting Yourself in an Earnout

For business owners who are negotiating an earnout as part of a sale, several protective measures are worth pursuing.

Define the earnout metric precisely. Vague references to "EBITDA" invite disputes. The purchase agreement should specify exactly how EBITDA is calculated for earnout purposes, including which accounting policies apply, how intercompany charges are treated, and whether the buyer's corporate overhead allocations can reduce the measured earnings. The more detailed the definition, the fewer opportunities for disagreement.

Negotiate operating covenants. Sellers should seek provisions that require the buyer to operate the business in a manner consistent with past practice during the earnout period. Without these protections, a buyer could theoretically redirect resources, change pricing strategies, or absorb the company's sales team into a different division, all of which could reduce the measured earnings and the earnout payment.

Establish a dispute resolution mechanism. The purchase agreement should specify how earnout calculations are reviewed, who arbitrates disagreements, and what the timeline looks like. Binding arbitration by an independent accounting firm is a common and generally efficient approach.

Consider an acceleration clause. An acceleration clause provides that if the buyer sells the business or a substantial portion of its assets during the earnout period, any remaining earnout payments become immediately due at the maximum amount. This protects the seller from a scenario where the buyer flips the business and captures the upside that should have flowed through the earnout.

What This Environment Means for Timing

The current deal structuring landscape has implications for when business owners should consider going to market. Sellers with strong trailing earnings, diversified customer bases, and limited exposure to tariff-affected supply chains are in the best position to negotiate favorable structures, including higher upfront consideration and smaller (or no) earnout components.

Sellers whose earnings are sensitive to tariff changes, energy costs, or the broader macroeconomic environment may face more aggressive structural requests from buyers. In these cases, waiting for external conditions to stabilize could result in cleaner deal terms, though waiting also carries the risk of a broader market correction or sector-specific downturn.

The middle ground, available to most business owners, involves preparation. Commissioning a quality of earnings analysis, organizing a comprehensive data room, and working with experienced M&A counsel to understand the structural terms likely to arise all improve the seller's negotiating position, regardless of what the broader market does.