Earnout in M&A: What the Deferred Price Is Worth

A seller holding two offers for the same company, one all cash and one with a higher headline, is usually choosing between cash and an earnout: a part of the price payable once the deal has closed, and only when the business meets targets set in the purchase agreement.

Outside life sciences the median performance period is 24 months, so a seller who accepts one waits two years for part of the money. This guide is for owners and CFOs on that side of the table, and for the corporate development and PE deal teams who propose the deferred part.

What is an earnout in M&A?

An earnout, also written earn-out or earn out, is a contingent price: acquirer and seller agree today on an amount that depends on what the business delivers once the acquirer owns it.

It differs from the other ways to pay later. A vendor loan is a fixed sum owed over time, and an escrow or holdback is a fixed sum kept back to cover claims and released if none arise.

Rollover equity, where the seller keeps a stake in the acquirer's vehicle, is a separate route.

Deloitte's legal M&A team notes that sellers are typically more optimistic about growth than acquirers are, and that a contingent price settles the difference on actual performance. That makes the deferred part a bet on the seller's own forecast, and a part the seller wouldn't back belongs in the comparison at zero.

On a sell-side M&A advisory engagement, spectup acts for the seller and compares the offers on price, structure and conditions.

The sell-side M&A process write-up covers how bids are run and compared against each other.

How common is an earnout, how large, and how long?

Outside life sciences, roughly one deal in five carries an earnout, and the share has swung between 15% and 37% in five years. Size and length decide how much of the price sits at risk. The table gathers what A&O Shearman's survey and SRS Acquiom report for these deals.

3 columns. Drag the table sideways; the first column stays put.

A contingent amount of 31% on top of closing payments makes up about 24% of the total price. At the median, then, roughly a quarter of the quoted price isn't in hand at closing. Life sciences runs longer, typically three to five years or more.

An acquirer who calls its deferred part standard can be held to the numbers: about one deal in five, and a median deferred part of 31% of closing payments. Offer B below defers 50% of its closing payments, well above that.

In Europe, CMS's 2026 study of 601 deals it advised in 2025 reports that earn-outs and EBIT/EBITDA-based earn-out metrics increased, without giving a share.

Which metric should earnouts measure?

Revenue is the most popular metric in earnouts, followed by earnings or EBITDA, and newer earnouts add non-financial targets such as customer retention, per A&O Shearman. The choice decides who controls the result.

Revenue sits out of reach of the acquirer's cost allocations, though pricing changes or moving customers to another unit still move it. EBITDA is closest to what an acquirer pays for, and overhead charges, integration costs and group fees reach it first. A milestone, such as a regulatory approval or a product launch, is a yes-or-no event that accounts can't move, but the acquirer's efforts can, as the Johnson & Johnson case below shows.

I'd take revenue, or gross profit with a margin floor, over EBITDA whenever the acquirer will fold the company into a larger one. Whichever metric wins, the purchase agreement has to define it in writing, since Deloitte says an undefined net profit can lead to disagreements.

How much do earnouts pay a seller?

SRS Acquiom's 2024 data shows that earnouts achieve about 21 cents on the dollar, and 59% of the deals it tracked paid anything on the earn-out. That's an average, so a single deal pays more or less, but it's the discount to put against a headline.

Illustrative example: Offer A is EUR 20M in cash. Offer B is EUR 24M, made of EUR 14M at closing, EUR 2M in escrow and an EUR 8M earnout. B beats A only if more than half of the deferred payment is made, since 16 + 0.5 × 8 = 20.

At 21 cents on the dollar, B pays EUR 17.7M, which is EUR 2.3M less than A. Its deferred part equals half of its closing payments, against a median of 31%, so it defers more than the typical offer does.

Where the acquirer controls the metric, I'd start from the 21 cents and ask for cash. Where the seller keeps control of what drives the result, the deferred part can be worth more than that.

Why do earnouts end in disputes?

After closing the acquirer runs the business and the books that measure it, so the seller's payment depends on accounts it doesn't control. SRS Acquiom's data shows earnouts contested at least 28% of the time.

As a rule of thumb, A&O Shearman says, a larger deferred share and a longer period both make a dispute likelier. The disagreements start in three places:

• The definition of the metric, such as a net profit nobody wrote down.

• The efforts standard, which runs from sole discretion to commercially reasonable efforts.

• Acceleration on a sale of the business, which almost 25% of non-life-science deals closed from 2014 to 2023 provided for.

“an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.”

Vice Chancellor J. Travis LasterDelaware Court of Chancery

Johnson & Johnson acquired Auris Health in 2019 for $3.4 billion at closing and up to $2.35 billion in contingent payments, each conditioned on FDA 510(k) approval of Auris's surgical robot. The FDA later closed the 510(k) route for the first indication. J&J stopped working towards the milestones, and none of the contingent money was paid.

The Court of Chancery awarded over $1 billion. On 12 January 2026, in Johnson & Johnson v. Fortis Advisors, the Delaware Supreme Court reversed the ruling on the first payment, because the agreement named 510(k) approval and nothing else, and upheld the breach of J&J's efforts obligations on the remaining payments.

“anchored their milestones to a specific regulatory category and nothing more”

Delaware Supreme Court on the milestonesJohnson & Johnson v. Fortis Advisors

A seller who wants protection lists every approval or clearance route that would count, across all categories, in the milestone definition.

What an earnout agreement should fix before exclusivity

The earnout agreement is settled in the letter of intent, because after exclusivity the seller has no competing offer to point to. The earn-out provision then sits in the purchase agreement beside the price, the adjustment and the indemnity.

3 columns. Drag the table sideways; the first column stays put.

The metric definition and the worked calculation come first, since every other term is measured against the number they produce.

How spectup runs a sell-side transaction that carries an earnout

spectup acts for the seller, is paid by the seller and finds the acquirers. A seller facing deferred price works in three steps:

1. Split every offer into cash at closing, fixed deferred amounts and the contingent part, then compare each at its break-even share.

2. Take the checklist terms to counsel before exclusivity.

3. Counsel drafts, the company and its counsel negotiate, and spectup prepares them for it.

Read the fee clause of any engagement letter against the same split, since its definition of transaction value decides whether deferred and contingent payments carry a fee, as the Lehman formula write-up shows.

The acquirer's side of the same structure belongs to buy-side M&A advisory, where a deferred part is one way to close a gap in valuation.

When a seller should accept earnouts and when to ask for cash

Accept an earnout when you keep control of what drives the metric, the earn-out provision defines it from the letter of intent on, and the acquirer's balance sheet can pay. Ask for cash when the acquirer controls the metric or carries heavy debt.

A cash bid sets the floor a deferred headline has to beat, and a bid that leans on deferral shows it next to bids that don't. In a buy-and-build, where every add-on draws on the same debt, a large deferred part on one target competes with the next acquisition for cash.

Before signing exclusivity, put both offers into one comparison at the break-even share. If the deferred offer still wins at 21 cents on the dollar, accept it.