Earnouts Paid at 21 Percent: A Hard Look at Contingent Consideration in 2026

In a market where buyers and sellers still struggle to agree on price, earnouts have become a default bridge. That is true at the lower middle market level, where sponsors are leaning on contingent consideration to get exits done, and it is true in life sciences and software, where post-close performance can move the value needle by half. A widely cited 2025 study by SRS Acquiom of one hundred recently closed deals, excluding life sciences, found that just 21 percent of the aggregate maximum earnout potential was paid. For owners considering a sale, that number deserves a long, hard look.

What an Earnout Actually Is

An earnout is a portion of the purchase price that is contingent on the business hitting agreed targets after close. The metrics are typically revenue, EBITDA, gross profit, or specific operational milestones, measured over one to three years. The structure splits the risk that buyer and seller disagree about post-close performance: the seller gets paid more if the business performs as forecast, and the buyer pays less if it does not.

The popularity of earnouts has grown steadily because they solve a real problem. When a buyer's underwriting case differs materially from the seller's projections, an earnout lets the parties commit at a workable headline number while resolving the disagreement through future performance. They are now showing up in roughly a third of private deals, with higher prevalence in software, healthcare services, and certain industrial sub-sectors.

Why the 21 Percent Number Matters

The headline figure deserves context. Twenty-one percent does not mean every seller missed badly; it means that in aggregate, across the dataset, only one fifth of the total maximum potential was earned. Some deals hit the full amount. Many hit zero. The distribution is unfavorable for sellers who treat the maximum as a near-certain payment.

Several forces drive the gap between maximum and actual payouts. Targets are typically set at the buyer's stretch case, not the realistic base case. Post-close integration disrupts revenue trajectory. Buyer behavior, including reporting choices, customer retention decisions, and capital deployment, can affect the metric in ways that the seller can no longer control. And in performance-based deals, the metric definition itself, particularly EBITDA, is the most disputed line in the contract.

Where Earnouts Go Wrong

Three patterns drive disputes and underperformance. First, the metric. EBITDA earnouts in particular invite disagreement because purchase accounting, inter-company allocations, and integration costs reshape the calculation. Revenue and gross profit are cleaner but offer less protection on margin. Seller-friendly contracts will define the calculation methodology in close detail, lock in any adjustments, and force the buyer to operate the business in the ordinary course during the earnout period.

Second, the buyer's operating discretion. After close, the buyer controls the business. A buyer who wants to lower the earnout can defer revenue recognition, accelerate investment that depresses near-term EBITDA, or change pricing strategy. Even buyers acting in good faith make decisions that affect the metric. Strong contracts include affirmative covenants requiring the buyer to operate the business consistent with past practice, limits on related-party transactions, and explicit restrictions on actions that would depress the earnout metric.

Third, the dispute resolution mechanism. Earnout litigation is up sharply over the last five years, and Delaware courts have become a center of gravity for disputes. The contract should specify how disagreements are resolved, including the role of an accounting expert versus a court, the timeline for objection, and the right to access information needed to verify the calculation.

When Earnouts Make Sense and When They Do Not

Earnouts work best when post-close performance is highly visible, the seller will remain in management for the earnout period, and the buyer's operating discretion is limited by the deal's structure. They are far less attractive when the seller will exit at close, the buyer plans aggressive integration, or the metric depends on factors the seller cannot influence.

Sellers should also be honest about negotiating leverage. In a single-buyer process with limited optionality, an earnout can become the only way to bridge the gap. In a competitive process, the right move is often to refuse contingent consideration and force the bidders to compete on certain consideration. The choice depends on how much true demand exists for the asset.

What to Watch Through 2026

Two threads will shape earnout practice this year. First, whether the recent uptick in Delaware earnout litigation produces opinions that reset baseline expectations for buyer conduct. Several pending decisions could expand or contract the implied covenant of good faith in the earnout context. Second, whether private equity exits continue to lean on earnouts to bridge the gap between sponsor expectations and buyer underwriting. If they do, the average payout ratio will likely tighten somewhat as buyers price the structure into their bids more aggressively.