An earn-out pays part of the price later, and only if the business hits agreed targets after the sale. It can close a gap that would otherwise end a deal. It can also start an argument that outlasts it.
Earn-outs exist because sellers and buyers rarely agree on the future. The seller sees the growth plan and wants to be paid for it. The buyer sees the risk and does not want to pay for results that may never arrive. An earn-out lets both be partly right: a fixed price at completion, and more later if the business delivers.
They work when three things are true. The targets are clear, and measured the same way before and after the sale. The seller keeps enough control over the things that drive the result. And the buyer will be able, and willing, to pay when the time comes.
They go wrong when the targets depend on decisions the seller no longer makes. A new owner can change pricing, move staff, merge the business into a larger group or allocate shared costs in a way that pushes profit below the line. None of this needs to be deliberate to cost the seller money.
The protections belong in the agreement, not in goodwill. How the target is defined, in revenue or profit, and which costs count. What the buyer may and may not change during the earn-out period. What happens if the business is sold again, merged or restructured before the period ends. How disputes are resolved, and by whom.
Length matters too. One to three years is common. The longer the period, the more the result depends on the buyer's decisions rather than the business the seller built.
For a seller, the useful question is simple: if nothing from the earn-out is ever paid, is the price at completion still acceptable? If the answer is no, the earn-out is carrying too much of the deal.
Used well, an earn-out lets a good business sell for what it is worth. Used carelessly, it turns part of the price into a hope.