What is an earn-out in an acquisition?
By SuLe · Updated 21 May 2026
An earn-out is deferred consideration in an acquisition — part of the price paid only if the business hits agreed performance targets after completion, usually revenue or EBITDA over one to three years. It bridges the gap between the seller's price and what the buyer will pay upfront, but it carries three real traps: control, measurement and tax.
Key facts
- An earn-out defers part of the price, paying it only if post-completion targets are met.
- Targets are commonly revenue or EBITDA over one to three years, with quarterly measurement and anti-manipulation covenants.
- Trap one — control: you no longer run the business that must hit the targets.
- Trap two — measurement disputes: vague metrics are where earn-out fights start.
- Trap three — tax: earn-outs tied to continued employment risk being taxed as income, not capital.
How does an earn-out work?
The buyer pays part of the price at completion and promises the rest — the earn-out — if the business performs against defined targets over a set period. Miss the targets and that portion is reduced or lost entirely.
It is a risk-sharing tool. When a buyer is unsure the business will keep growing, an earn-out ties part of what they pay to it actually doing so, while giving the seller upside if it does.
It also keeps founders engaged through the handover. The flip side is that a chunk of your consideration is now contingent and, often, out of your direct control. [More: What is a share purchase agreement (SPA)?]
Why is losing control the core problem?
Because after completion, you no longer run the company that has to hit the targets — the buyer does. They set the budget, the strategy and the priorities, and any of those can move your targets out of reach.
If the buyer redirects the sales team, folds your product into a larger group, or cuts marketing to boost short-term profit, your revenue or EBITDA target can slip through no fault of yours. Yet your earn-out depends on it.
The protection is contractual: anti-manipulation covenants, agreed operating commitments, and clear boundaries on what the buyer can change during the earn-out period. Negotiate these hard, because once signed you are relying on them.
How should earn-out targets be measured?
Precisely. Earn-outs commonly run against revenue or EBITDA over one to three years, with quarterly measurement and anti-manipulation covenants that stop the buyer massaging the numbers.
The detail is everything. EBITDA in particular can be shaped by how costs are allocated, so define exactly how the metric is calculated, what is included, and how group overheads are treated. Vague definitions are precisely where earn-out disputes ignite.
Build in a mechanism for resolving disagreements — an independent expert, say — because measurement rows are common and you want a route through them that is not litigation.
| Element | Typical position | Why it matters |
|---|---|---|
| Metric | Revenue or EBITDA | EBITDA is more manipulable; define it tightly |
| Period | One to three years | Longer means more exposure to buyer decisions |
| Measurement | Quarterly | Frequent checkpoints reduce surprises |
| Protections | Anti-manipulation covenants | Stop the buyer gaming the targets |
| Dispute route | Independent expert | Avoids litigation over the numbers |
Can an earn-out be taxed as income?
Yes, and this is the trap that costs founders the most. If the earn-out is structured as extra consideration for your shares, it is generally taxed as a capital gain. But if it is tied to your continued employment, HMRC may treat it as employment income — taxed more heavily.
The distinction turns on the drafting and the commercial reality: an earn-out that looks like a reward for staying and working, rather than payment for the business, is vulnerable to recharacterisation.
Because the tax difference is large, get advice on structure before signing, not after. This is not a point to leave to chance in the SPA. [More: What is a founder secondary and when can I sell some of my shares?]
Worked example
Elena sells her martech company for a headline £5m: £3m at completion and up to £2m as an earn-out over two years, tied to reaching £4m of annual recurring revenue (ARR), on a sliding scale.
At the end of the period the business hits £3.2m ARR — 80% of target — so the sliding scale pays 80% × £2m = £1.6m. Elena's total consideration is £3m + £1.6m = £4.6m, not the full £5m headline.
Two things saved value: anti-manipulation covenants stopped the buyer diverting the sales team during the period, and her solicitor structured the earn-out as consideration for her shares rather than for staying employed, protecting capital tax treatment. Quarterly measurement meant no nasty surprise at the end.
Where founders go wrong
Fixating on the headline number
— the earn-out portion is contingent; model the realistic, not the maximum, payout.Ignoring loss of control
— the buyer runs the business that must hit the targets; without anti-manipulation protection your earn-out is at their mercy.Leaving metrics vague
— undefined EBITDA or revenue terms are the classic source of earn-out disputes.Tying the earn-out to employment
— that risks income-tax treatment instead of capital; structure it as consideration for your shares.
Related questions
What is an earn-out?
Deferred consideration in an acquisition that is only paid if the business hits agreed performance targets after completion — commonly revenue or EBITDA over one to three years. It bridges a gap between what the seller wants and what the buyer will pay upfront.
Why do buyers use earn-outs?
To share risk. If a buyer is unsure the business will keep performing, an earn-out ties part of the price to it actually doing so. It also keeps founders motivated and involved through the transition rather than walking away the day the deal closes.
What is the biggest earn-out trap?
Losing control. You no longer run the business that has to hit the targets — the buyer does. If they change strategy, cut budgets or fold you into a bigger group, your targets can slip through no fault of yours. Anti-manipulation protections matter.
Can an earn-out be taxed as income?
Yes — a serious trap. If the earn-out is tied to your continued employment rather than to the sale of your shares, HMRC may treat it as employment income taxed at higher rates, not a capital gain. Structure and advice matter before you sign. [More: What is a founder secondary and when can I sell some of my shares?]
How are earn-out targets usually measured?
Commonly against revenue or EBITDA over one to three years, with quarterly measurement and anti-manipulation covenants that stop the buyer gaming the numbers. Define the metrics precisely — vague targets are where earn-out disputes start.
An earn-out can turn a strong headline price into a fraction of it if control, measurement and tax are not nailed down in the drafting — and each of those is negotiable. A SuLe solicitor can structure the earn-out to protect both your payout and its capital tax treatment. Book a free consultation with a startup solicitor before you agree the deferred terms.
Keep reading: What is a share purchase agreement (SPA)? · Share sale vs asset sale — what's the difference for founders? · What legal prep does a startup need before an exit? · What is a founder secondary and when can I sell some of my shares? · How do liquidation preferences play out in an exit waterfall? · What happens to employee options when a startup is acquired?
Primary sources: Companies Act 2006 · HMRC — capital gains and employment-related securities guidance
