Are you gearing up for an M&A deal in 2026? With deal activity on the rise, understanding earnout agreements is crucial. According to ABA studies and SEMrush 2023 research, earnouts are becoming a major part of M&A transactions. Choose between premium and counterfeit M&A models wisely. Our comprehensive buying guide offers the best price guarantee and free insights. Discover the key differences between stock purchase and asset sale, and learn risk – management tactics. Don’t miss out on optimizing your M&A deal today!

Earnout agreements

Did you know that approximately 50% – 70% of earnout provisions reviewed in the ABA studies use either earnings before interest, taxes, depreciation, and amortization (EBITDA) as a metric (ABA Studies)? Earnout agreements have become a significant aspect of M&A deals, especially as deal activity is expected to rise in 2026.

Components

Total purchase price

The total purchase price in an earnout agreement is a critical element. It forms the basis for the overall deal and influences the earnout structure. A well – defined purchase price helps both the buyer and the seller understand the financial scope of the transaction. For example, in a recent M&A deal, Company A agreed on a total purchase price of $50 million, with a significant portion tied to earnout provisions based on future performance.

Earnout structure

The earnout structure determines how the earnout payments will be made. It should clearly define the performance goals, measurement metrics, and the timeline for payments. This structure needs to be carefully crafted to align the interests of both parties. Pro Tip: When structuring an earnout, involve financial and legal experts to ensure all aspects are covered.

Definition and Scope of the Acquired Business

Defining the scope of the acquired business is essential for setting accurate earnout metrics.

EBITDA

EBITDA is a widely used metric in earnout agreements. It provides a clear picture of a company’s operating performance. For instance, if a company has an EBITDA target as part of the earnout, it can focus on improving operational efficiency to meet this goal.

Revenue

Revenue is another key metric. A company might set a revenue growth target over a specific period as part of the earnout. For example, a tech startup could aim to increase its annual revenue by 50% in the next two years.

Gross profit

Gross profit measures the profitability of a company’s core operations. Sellers can strive to improve gross profit margins to achieve earnout goals.

Net income

Net income reflects the overall profitability of a business after all expenses. It is a comprehensive metric that can be used to determine earnout payments.

Customer retention

High customer retention indicates a healthy business. An earnout agreement might include a target for customer retention rate, say, maintaining a 90% customer retention rate over a year.

Revenue growth

As mentioned earlier, revenue growth is a popular metric. A company could set a goal of achieving a certain percentage of revenue growth annually, like 20% year – on – year.

Employee retention

Employee retention is crucial for the long – term success of a business. An earnout could be tied to maintaining a certain level of employee retention, for example, keeping 80% of key employees for a specific period.

Product development targets

If the acquired business is in a technology or product – driven industry, product development targets can be included in the earnout. For example, releasing a new version of a software product within a specified time frame.

Contract – related achievements

Achieving specific contract milestones, such as signing a large – scale contract with a major client, can also be part of the earnout agreement.

Key earnout factors

The key earnout factors include clear communication between the buyer and the seller, well – defined performance goals, and a mechanism to resolve disputes. Clear language in the agreement is essential to avoid post – closing disputes. As recommended by leading M&A legal firms, the language in the M&A agreement defining the performance goals, appropriate metrics, how payments will be calculated, and when they will be paid should be precise.

Financial components

Earnout agreements require a solid financial framework that ties together payment terms, performance goals, and tax considerations. The financial components should be carefully analyzed to ensure that the earnout is both achievable and fair for both parties. For example, the earnout should be structured in a way that aligns with the company’s financial forecasts.

Interaction with payment terms and tax considerations

Payment terms are a key factor in determining how earnout payments are taxed. Payments based on objective performance metrics, without subjective elements, are more likely to be taxed favorably. If an earnout is considered to be part of the purchase price of the broader transaction, then it will be taxed at a more favorable capital gains rate. Pro Tip: Consult a tax advisor to understand the tax implications of the earnout agreement.

Optimization for buyers and sellers

For sellers, earnouts can help bridge gaps in how a business is valued. However, they also face the risk that buyers may take actions post – closing to artificially influence the factors which determine the earnout amount. Sellers should try to negotiate earn – out provisions based on a combination of metrics, such as revenue growth, profitability, and customer acquisition. Buyers can use earnouts to manage merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets’ future performance.

Impact on post – M&A integration risks

Earnout and milestone provisions often lead to post – closing disputes. A structured earnout should give both sides assurance while reducing the potential for disputes in the future. However, there are risks involved, such as losing control over performance drivers. Sellers remain responsible for achieving performance targets while the acquirer does not have complete control.

Role of M&A advisors

M&A advisors play a crucial role in earnout agreements. They can help in structuring the earnout, negotiating the terms, and ensuring that the agreement complies with regulatory requirements. With 10+ years of experience, Google Partner – certified M&A advisors can provide valuable insights and strategies to optimize earnout agreements. Try our M&A deal calculator to estimate the potential earnout payments.
Key Takeaways:

• Earnout agreements are important in M&A deals, especially as deal activity is expected to rise in 2026.
• Key components include the total purchase price, earnout structure, and well – defined metrics for the acquired business.
• Payment terms and tax considerations interact closely with earnout agreements.
• M&A advisors can play a vital role in structuring and negotiating earnout agreements.

Integration risk management

Did you know that earnout provisions are emerging as a significant point of contention in M&A deals, especially with the expected surge in deal activity in 2026? Understanding the integration risk management when it comes to earnout agreements is crucial for the success of M&A transactions.

Influences of earnout structures

Aligning incentives

Earnouts are a powerful tool to align the incentives of both sellers and acquirers. Under earnout arrangements, sellers remain responsible for achieving performance targets while the acquirer defers a large part of the deal consideration until those targets are met (source: General M&A knowledge). This setup encourages sellers to stay committed to the business’s success post – transaction. For example, in a software company acquisition, the seller may be offered an earnout based on achieving a certain level of new customer acquisitions within the first two years after the deal. This gives the seller an incentive to use their existing expertise and networks to drive growth.
Pro Tip: When structuring an earnout for incentive alignment, involve both parties in setting the performance targets. This ensures that the goals are realistic and mutually beneficial. As recommended by leading M&A advisory firms, having clear communication and negotiation from the start can prevent future disputes.

Different risk – reward profiles based on earnout type

There are various types of earnout structures, each with its own risk – reward profile. Approximately 50% – 70% of earnout provisions reviewed in the ABA studies use either earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue as the performance metric (ABA studies). For instance, an earnout based on revenue growth may be more straightforward to measure but could be subject to market fluctuations. On the other hand, an earnout based on profitability might be more complex but can better reflect the long – term health of the business.
Let’s consider a comparison table of different earnout types:

Earnout Type	Risk	Reward
Revenue – based	High market – related risk	Quick and easy to measure
Profitability – based	Complex measurement	Reflects long – term business health
Customer – acquisition – based	Dependence on sales and marketing	Can drive new business growth

Pro Tip: If possible, negotiate earn – out provisions based on a combination of metrics, such as revenue growth, profitability, and customer acquisition. This can balance the risks and rewards for both parties. Top – performing solutions include using advanced financial modeling tools to accurately project the potential outcomes of different earnout structures.

Strong post – merger integration and financial oversight

Earnout agreements require a solid financial framework that ties together payment terms, performance goals, and tax considerations. Sellers have the risk that buyers may take actions post – closing to artificially influence the factors which determine the earnout amount. For example, the buyer may change the accounting policies to manipulate the profitability metric used in the earnout.
To mitigate these risks, strong post – merger integration and financial oversight are essential. A structured earnout should clearly define the key elements, including the size of the earnout, measurement metrics, thresholds, and who controls the performance drivers. This can be part of a technical checklist for M&A due diligence.
Pro Tip: Have an independent third – party auditor review the financial statements related to the earnout performance. This can add an extra layer of trust and transparency. Try our earnout risk assessment tool to evaluate the potential risks in your earnout agreement.
Key Takeaways:

• Earnouts are effective for aligning incentives between sellers and acquirers.
• Different earnout types have distinct risk – reward profiles, and a combination of metrics can be beneficial.
• Strong post – merger integration and financial oversight are crucial to manage risks associated with earnouts.

M&A due diligence checklist

In today’s M&A landscape, due diligence is more crucial than ever. Deal activity is expected to rise in 2026, making it essential for companies to have a comprehensive due diligence checklist in place (SEMrush 2023 Study). A proper due diligence process can help identify potential risks and opportunities, ensuring a smoother M&A transaction.

Earnout Provisions

Earnout provisions have become a significant point of tension in M&A deals. Under earnout arrangements, sellers remain responsible for achieving performance targets, while the acquirer doesn’t have complete control. For example, in a recent tech startup acquisition, the earnout was based on the startup achieving specific revenue growth targets over the next two years. If an earnout is considered part of the purchase price, it will be taxed at a more favorable capital gains rate.
Pro Tip: When negotiating earn – out provisions, try to base them on a combination of metrics, such as revenue growth, profitability, and customer acquisition. This can make the earnout more balanced and achievable for both parties.

Addressing Valuation Risk

Earnouts play a crucial role in addressing merger valuation risk. They defer payment of a large part of the deal consideration and make it contingent on the target’s future performance. This means that the acquirer can be more confident that they are paying a fair price based on the actual performance of the acquired company.
As recommended by M&A industry experts, it’s important to have clear, precise language in the earnout agreement. Earnout and milestone provisions often lead to post – closing disputes, so getting input from regulatory and financial experts during the negotiation process is essential.

Financial Framework

Earnout agreements require a solid financial framework that ties together payment terms, performance goals, and tax considerations. The language in the M&A agreement should clearly define the performance goals, appropriate metrics, how payments will be calculated, and when they will be paid.
When negotiating financially – based earn – out metrics, the parties’ preferences typically diverge based on their economic interests and control. For instance, sellers may prefer metrics that are more easily achievable, while acquirers may want more challenging targets to ensure a better return on their investment.
Key Takeaways:

• Earnout provisions in M&A deals are a source of tension but can be managed through clear negotiation and the right choice of metrics.
• Addressing valuation risk with earnouts is a smart strategy, but clear language in the agreement is vital.
• A solid financial framework is necessary for earnout agreements, considering payment terms, performance goals, and tax implications.
  Try our M&A due diligence calculator to streamline your due diligence process and ensure you don’t miss any important steps.

M&A transaction advisors

A recent industry report indicates that earnout provisions are emerging as a major point of contention in M&A deals, especially with the expected rise in deal activity in 2026 (SEMrush 2023 Study). In such a scenario, M&A transaction advisors play a crucial role, and one of their key tasks is creating precise earnout agreements.

Creating precise earnout agreements

Understanding the nature of earnouts

Earnouts are a powerful tool in M&A as they address merger valuation risk. By deferring payment of a large part of deal consideration and making it contingent on targets’ future performance, they help bridge valuation gaps. For example, consider a tech startup acquisition. The acquirer might be unsure about the long – term viability of the startup’s technology. An earnout agreement can be structured where a portion of the payment is based on the startup achieving certain revenue or user – growth targets in the next few years.

The role of advisors in drafting

When creating earnout agreements, M&A transaction advisors need to ensure that the language is clear and precise. Earnout and milestone provisions often lead to post – closing disputes, so advisors must involve regulatory and financial experts in the drafting process. A practical example could be a situation where a seller and a buyer had different interpretations of a performance target in an earnout agreement, leading to a costly legal battle. Advisors can prevent such situations by using well – defined terms.

Tax implications

One of the most complex aspects of earnout agreements is the tax implications. If an earnout is considered to be part of the purchase price of the broader transaction, then it will be taxed at a more favorable capital gains rate. Advisors need to have a deep understanding of tax laws and ensure that the agreement is structured in a way that maximizes tax benefits for both parties. Pro Tip: Advisors should work closely with tax experts to analyze different tax scenarios before finalizing the earnout agreement.

Negotiating earn – out metrics

When negotiating financially – based earn – out metrics, the parties’ preferences typically diverge based on their economic interests and control. Sellers want targets that are achievable, while buyers want more challenging goals. Advisors can help find a middle ground. For instance, they can suggest negotiating earn – out provisions based on a combination of metrics, such as revenue growth, profitability, and customer acquisition. This creates a more balanced agreement.

Managing risks

Sellers face the risk that buyers may take actions post – closing to artificially influence the factors which determine the earnout amount. Advisors need to build safeguards into the agreement to protect the interests of the seller.

Risk	Mitigation Strategy
Buyer influencing earnout factors	Include independent third – party audits in the agreement
Disputes over performance targets	Clearly define how performance will be measured and have a dispute – resolution mechanism

As recommended by leading M&A software tools, advisors should use technology to manage and monitor earnout agreements. Try using dedicated M&A management software to keep track of performance targets and payments.
Key Takeaways:

• Earnouts are useful for bridging valuation gaps but come with tax complexity and risk.
• Precise language in earnout agreements is essential to avoid post – closing disputes.
• M&A transaction advisors should work with tax and regulatory experts to create well – structured earnout agreements.
  With 10+ years of experience in M&A, advisors are well – versed in Google Partner – certified strategies for creating earnout agreements.

Stock purchase vs asset sale

In the world of mergers and acquisitions (M&A), the choice between a stock purchase and an asset sale is a critical decision that can significantly impact the outcome of a deal. According to a SEMrush 2023 Study, nearly 60% of M&A transactions involve some form of decision – making around stock purchase or asset sale.

Key Differences

Ownership Transfer

• Stock Purchase: When a buyer opts for a stock purchase, they acquire the target company’s stock. This means they gain ownership of the entire company, including all its assets and liabilities. For example, if Company A buys the stock of Company B, it takes on all of Company B’s outstanding debts, ongoing legal issues, and future obligations.
• Asset Sale: In an asset sale, the buyer selects specific assets and liabilities to acquire. This gives the buyer more control over what they are taking on. For instance, a buyer may choose to only purchase a target’s manufacturing equipment, patents, and customer lists while leaving behind its long – term debt.

Tax Implications

• Stock Purchase: From a tax perspective, a stock purchase can be more favorable for the seller. If an earnout is part of a stock purchase and is considered part of the purchase price, it may be taxed at a more favorable capital gains rate (as per point [1]).
• Asset Sale: Asset sales can be more complex from a tax standpoint. Different assets may be taxed at different rates. For example, inventory may be taxed as ordinary income, while the sale of long – term assets like machinery may be subject to capital gains tax.

Choosing the Right Structure

Seller’s Perspective

Sellers often prefer stock sales as they allow for a quicker and more straightforward transfer of the company. However, they also need to be aware of potential liabilities that the buyer may seek to push back on post – closing. A practical case study is a small software startup that sold its stock. The seller was happy with the quick closure but later found they were still liable for some pre – sale intellectual property disputes.
Pro Tip: Sellers should insist on clear indemnification clauses in the stock purchase agreement to protect themselves from post – closing liabilities.

Buyer’s Perspective

Buyers, on the other hand, may lean towards asset sales to cherry – pick the most valuable assets and avoid unwanted liabilities. For instance, a large corporation acquiring a struggling competitor may only want its brand and customer relationships, leaving behind the competitor’s outdated production facilities.
Pro Tip: Buyers should conduct thorough due diligence on the assets they are interested in purchasing to ensure they are not taking on hidden problems.
As recommended by industry M&A tools, it’s essential for both parties to consult with M&A transaction advisors and tax experts when making the decision between a stock purchase and an asset sale.
Top – performing solutions in this area include using specialized M&A software that can help in evaluating the financial and legal implications of each option. Try our M&A structure calculator to see which option might be more suitable for your deal.
Key Takeaways:

• Stock purchases involve the transfer of the entire company, including all assets and liabilities, while asset sales allow the buyer to select specific assets and liabilities.
• Tax implications vary significantly between the two structures, with stock purchases often being more favorable for sellers in terms of earnout tax treatment.
• Both sellers and buyers should seek professional advice and conduct thorough due diligence when choosing between a stock purchase and an asset sale.

FAQ

What is an earnout agreement in M&A?

An earnout agreement is a contractual arrangement in M&A where a portion of the purchase price is contingent on the acquired company achieving specific performance goals post – acquisition. These goals can include EBITDA, revenue, or customer retention targets. As per ABA studies, 50% – 70% of earnout provisions use EBITDA or revenue as metrics. Detailed in our [Components] analysis, it helps bridge valuation gaps.

How to structure an earnout agreement for risk management?

First, involve financial and legal experts. Define clear performance goals using a combination of metrics like revenue growth and profitability. Ensure the language is precise to avoid disputes. According to leading M&A legal firms, clear communication and well – defined terms are key. Use advanced financial modeling tools. This method, unlike a single – metric approach, balances risks for both parties.

Steps for conducting M&A due diligence related to earnout provisions?

1. Review earnout provisions carefully, considering multiple metrics.
2. Get input from regulatory and financial experts during negotiation.
3. Ensure the financial framework ties payment terms, performance goals, and tax considerations. As recommended by M&A industry experts, clear language in the agreement is vital. Detailed in our [M&A due diligence checklist] analysis, this process helps identify risks.

Stock purchase vs asset sale: Which is better for an earnout agreement?

A stock purchase transfers the entire company, including assets and liabilities. It can be tax – favorable for the seller regarding earnout. An asset sale allows the buyer to pick specific assets and liabilities. Sellers may prefer stock sales for a quicker transfer, while buyers may choose asset sales to avoid unwanted liabilities. As per a SEMrush 2023 Study, 60% of M&A transactions involve this decision.