Earnouts Are Getting Bigger: What Sellers Should Know Before They Sign

When a buyer and a seller cannot agree on price, they increasingly agree to disagree and put the difference into an earnout. New deal terms data shows earnouts appearing in more private-company transactions, with more money riding on them than in prior years. For a business owner heading into a sale, that means a growing share of your headline price may depend on how the company performs after you hand over the keys.

More Deals Now Include an Earnout

An earnout is a portion of the purchase price that the buyer pays only if the business hits agreed targets after closing, typically revenue or earnings goals measured over one to three years. Instead of arguing over what the company will do next year, the parties let next year settle the question.

SRS Acquiom's 2026 Deal Terms Study, which analyzed more than 2,300 private-target acquisitions worth a combined $569 billion, found that earnouts appeared in 24 percent of deals in 2025, up from 22 percent the year before. The size of the contingent piece grew as well: the median earnout potential climbed from 31 percent to 34 percent of the closing payment. On a deal with $10 million paid at closing, that is roughly $3.4 million left riding on future results.

Term lengths have compressed toward the middle. Earnout periods of one to two years were the most common structure, covering 38 percent of deals with earnouts, compared with 23 percent running a year or less and 20 percent running two to three years.

Market watchers expect the trend to continue through the second half of 2026. Mid-market outlooks point to more creative deal structures, including earnouts, minority recapitalizations, and partial liquidity transactions, as buyers and sellers work to close persistent valuation gaps. In the lower middle market, earnouts commonly represent 10 to 25 percent of total consideration, with larger contingent components showing up in healthcare and technology-enabled services deals.

Why Buyers Keep Reaching for This Structure

The earnout's growing popularity follows directly from the market conditions we have covered in recent weeks. Survey data now shows price disagreement, not diligence findings, as the leading reason deals fall apart. Meanwhile, borrowing costs remain elevated, and buyers who finance acquisitions at today's rates have less room for error in their underwriting.

An earnout lets a buyer say yes to a seller's number without fully committing to it. The buyer pays a defensible price at closing based on demonstrated performance, and agrees to pay the more optimistic increment only if the seller's projections prove out. From the buyer's chair, this shifts forecast risk back to the person who wrote the forecast.

For sellers, the structure is not inherently bad. An earnout can be the only way to get paid for genuine near-term upside, such as a signed contract that has not yet generated revenue or a new product line still ramping. The problem is not the concept. The problem is the gap between what earnouts promise and what they historically pay.

What Earnouts Actually Pay

The claims data deserves more attention than it usually gets. Across deals with earnouts that SRS Acquiom has tracked, earnouts have paid out roughly 21 cents for every potential dollar. Even among earnouts that pay something, sellers collect only about half of the maximum on average. A seller who books the full earnout as part of their expected proceeds is, statistically speaking, planning around an outcome that most sellers do not experience.

Some of that shortfall reflects honest business underperformance. Markets shift, customers leave, integrations distract. But a meaningful share traces back to how the earnout was designed: targets set at stretch levels, metrics the seller no longer controls after closing, and measurement periods that begin during the turbulence of ownership transition.

The choice of metric matters more than most sellers appreciate. Revenue is the most common earnout measure in private deals, used far more often than EBITDA (earnings before interest, taxes, depreciation, and amortization, a standard proxy for operating cash flow). Revenue is harder for a buyer to influence through accounting choices, since cost allocations after closing can depress an earnings-based target even when the business performs. Many deals now measure more than one metric, which adds precision but also adds ways to miss.

Where Earnouts Go Wrong

Most earnout disputes are not about arithmetic. They are about control. After closing, the buyer runs the business, sets budgets, allocates overhead, and decides which opportunities to pursue. Each of those decisions can move the earnout needle, and the seller is watching from the sidelines, or at best from an employment agreement.

Common friction points follow a pattern. The buyer merges the acquired company into a larger unit and the earnout metrics become hard to isolate. The buyer cuts marketing spend or reassigns the sales team, and revenue misses the target. The buyer delays a product launch that the seller's projections assumed. None of these require bad faith, yet all of them cost the seller money.

Sellers can negotiate protections, and the strongest ones are structural rather than aspirational. A covenant requiring the buyer to operate the business consistent with past practice during the earnout period gives the seller a contractual anchor. Acceleration clauses that pay the earnout in full if the buyer resells the company or materially changes its operations protect against midstream strategy shifts. Clear accounting definitions, agreed in advance and attached as an exhibit, prevent the post-closing debate over what counts.

How to Weigh an Earnout Offer

The discipline that serves sellers best is simple to state: value the closing payment as the deal, and treat the earnout as upside. If the cash at closing does not meet your walkaway number, an earnout should not be what talks you into signing. This framing also sharpens negotiation, since a seller who treats contingent dollars as a bonus can trade earnout size for better terms, tighter covenants, or a shorter measurement period.

It also pays to consider the tax and timing consequences early. Earnout payments received in later years may be taxed differently than closing proceeds depending on how the deal is structured, and installment treatment, escrow interactions, and employment-linked payments each carry their own rules. This is a conversation to have with your advisors before the letter of intent, not after.

Expect earnouts to stay on the table for the rest of 2026. As long as valuation gaps remain the leading deal killer and financing stays expensive, buyers will keep proposing structures that share forecast risk. Sellers who understand how these provisions actually perform will negotiate them from a position of knowledge rather than hope.