Earnouts bridge valuation gaps by tying part of the purchase price to future performance. They can work well or create years of conflict, depending on how they are structured.
When earnouts make sense
Bridging genuine uncertainty about forward performance, particularly when recent growth is hard to verify or a major customer contract is pending renewal.
How to structure them
Tie metrics to objective, measurable, easily auditable numbers (revenue or EBITDA, not customer satisfaction). Keep the earnout period short (12 to 24 months). Cap downside and upside clearly.
What to avoid
Earnouts tied to sponsor-controlled decisions (R&D spending, hiring, M&A) are a recipe for dispute. Long earnouts (three to five years) almost always end in lawsuits.
Push back when
The earnout exceeds 25 percent of total consideration, the metric is partially within sponsor control, or the calculation methodology is vague.
If you are evaluating a transaction in this space and want a candid second look, Solender Capital is happy to compare notes. Reach out through our contact page and share what you are working on.