Selling a business rarely means banking one number on settlement day. Increasingly, part of the agreed price sits behind an earnout, a deferred payment tied to how the business performs after you have handed over the keys. On paper it looks like a sensible bridge between what you believe the business is worth and what a buyer is prepared to pay upfront.
In practice, an earnout changes the shape of the deal. You are no longer simply selling a business, you are accepting a bet on outcomes that someone else will largely control. For owner-led businesses across Queensland, NSW and Victoria, that shift deserves far more scrutiny than it usually gets in the excitement of agreeing a headline figure.
Why the earnout exists in the first place
Buyers reach for earnouts when there is a genuine gap between what a seller believes the business is worth and what the buyer is comfortable paying for certainty on day one. If revenue is concentrated in a handful of customers, if a key manager or the owner is the reason clients stay, or if the last two years have grown faster than the buyer thinks is sustainable, an earnout lets the buyer pay a fuller price only if those risks do not materialise. From the buyer’s chair this is fair. They are pricing risk they cannot fully diligence in the weeks before completion, which is exactly the kind of gap an indicative business valuation is designed to surface early, well before it becomes a negotiating point.
The pattern we typically see is that owners accept the earnout structure quickly because the headline number looks right, without pricing what they are giving up to get there. The two figures, price offered and price actually received, can end up a long way apart.
What you are really betting on when you sign
Once settlement happens, control of the levers that determine your earnout usually passes to the buyer. Pricing decisions, staffing changes, which product lines get pushed, how overheads from the buyer’s existing business get allocated across the combined entity, all of it sits with someone else now. If the earnout is based on EBITDA rather than revenue, a buyer’s decision to invest in new systems, absorb your business into shared services, or run a different marketing strategy can quietly compress the very number your final payment depends on. None of this needs to be deliberate to hurt you. It just needs to be a decision made in the buyer’s interest rather than yours, which is what happens by default once you are no longer the one making it.
There is also a people dimension that gets underweighted. Many earnouts require the owner to stay on for twelve to twenty-four months to help deliver the targets, which sounds reasonable until the working relationship with the new owner turns out to be different from the courtship phase of the deal. The pattern across owner-led businesses is that the earnout period is where sale regret, if it happens, tends to show up.
Structuring terms that protect you, not just the buyer
None of this means earnouts should be refused outright. They are often the only realistic way to close the gap between a seller’s price and a buyer’s comfort, and refusing one can mean walking away from an otherwise good deal. The difference between a well-structured earnout and a costly one usually comes down to a handful of terms negotiated before signing, not after.
Base the earnout on revenue rather than EBITDA wherever possible, since revenue is far harder for a buyer to manipulate through cost allocation than a profit line is. Keep the earnout period as short as commercially defensible, because every extra month is another month of decisions you do not control. Insist on reporting and audit rights over how the earnout metric is calculated, and define exactly which costs and adjustments are permitted. And where the business’s value depends heavily on the owner staying close to key relationships or systems, that dependency is worth quantifying before you ever sit down with a buyer, which is the specific gap an exit readiness diagnostic is built to close.
The businesses that negotiate the cleanest earnout terms are usually the ones that walked into the conversation already knowing their numbers, their customer concentration and their owner dependency cold, rather than discovering the weak points during the buyer’s due diligence. That preparation work, done properly ahead of a sale process, is covered in our exit readiness guide, and it is worth doing months before a buyer is at the table, not during the negotiation itself.
If a sale is somewhere on your horizon, even a distant one, the earnout conversation is easier to win before you have a term sheet in front of you than after. A discovery call is a low-pressure way to work out how much of your eventual price should ever be allowed to sit behind someone else’s decisions.
Frequently asked questions
What is an earnout clause in an Australian business sale?
An earnout is a deferred portion of the sale price that only gets paid if the business hits agreed performance targets after settlement, usually measured over twelve to twenty-four months. It lets a buyer pay a fuller price without taking on the full risk of future performance upfront, in exchange for the seller carrying part of that risk instead.
Should I accept an earnout when selling my business?
It depends on how much of the total price sits behind it and how much control you retain over the metric it is measured against. An earnout worth a small share of the price, based on revenue rather than profit, is far less risky than one that makes up half the deal and depends on decisions the new owner will make.
Is it safer to base an earnout on revenue or EBITDA?
Revenue is generally the safer base because it is harder for a buyer to influence through cost allocation, overhead absorption or investment decisions made after settlement. An EBITDA-based earnout gives the buyer more room to affect the number your final payment depends on, even without any intent to do so.
How long should an earnout period run for in a sale agreement?
Shorter is generally better for the seller. The pattern we typically see across owner-led businesses is that every extra month under an earnout is another month of decisions, staffing and strategy sitting with someone else while your final payment still depends on the outcome. Twelve months is more defensible than twenty-four unless the price gap genuinely needs the longer runway.
Can a buyer affect the numbers an earnout is based on?
Yes, often without any deliberate intent. Decisions about pricing, staffing, systems investment and how shared costs get allocated across a combined business can all move the metric your earnout depends on. This is exactly why reporting rights, audit access and a clearly defined calculation method need to be negotiated into the agreement before signing.
How do I prepare my business to negotiate a smaller earnout?
The strongest negotiating position comes from reducing the specific risks a buyer is trying to price with the earnout in the first place, such as customer concentration or owner dependency. An exit readiness diagnostic scores those risks well before a buyer is at the table, so you walk into negotiations already knowing where the gaps are.
What is the difference between sale price and the price I actually receive?
The headline sale price is what gets announced or agreed in principle. What you actually receive depends on completion adjustments, warranty claims and, if the deal includes one, whether the earnout targets are met. For deals with a meaningful earnout component, the two figures can end up materially different.
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