Earnouts bridge valuation gaps between buyer and seller by tying a portion of the purchase price to future performance. They also generate more post-closing disputes than almost any other deal structure, because the metrics that felt clear during negotiation get interpreted very differently once the buyer is actually running the business.
Define the Metric With Painful Specificity
Revenue sounds like a simple earnout metric until the buyer changes pricing, bundles the acquired product into a larger offering, or reallocates sales resources away from it. I now insist on defining exactly how the metric will be calculated, what accounting standards apply, whether it's measured on a standalone basis or consolidated, and what happens if the buyer makes operational changes that affect the number either way.
EBITDA-based earnouts are worse in this respect, because they're vulnerable to overhead allocation decisions entirely within the buyer's control. I avoid EBITDA earnout metrics whenever I can negotiate around them, preferring revenue or unit volume metrics that are harder for a buyer to manipulate through internal accounting choices after closing.
Protect Your Ability to Actually Hit the Number
The other critical clause is operational control during the earnout period. If I'm being measured against a target, I need contractual protection ensuring the buyer won't starve the acquired business of the resources, sales support, or marketing budget it needs to hit that number. Without that protection, the earnout period becomes a period where the buyer has every incentive to underinvest, because a missed earnout target saves them money.
I negotiate minimum resource commitments, a defined reporting cadence with audit rights, and a dispute resolution mechanism that doesn't default to litigation. Earnouts work when both sides genuinely want the target hit. Structure the deal to make sure that alignment survives past closing day.