The earn-out that never paid outNow I have everything I need to write a deeply researched, fully sourced, narrative deep dive. Let me compose the piece.
title: “The earn-out that never paid out” description: “An illustrative case study of a business sale where the deferred earn-out unravelled, and what the seller learned about how deal money really moves.” category: “business” pubDate: 2026-06-15 readTime: “17 min”
The earn-out that never paid out
The wire cleared on a Tuesday morning. Four million dollars — the closing payment on the sale of a software services firm that Marcus had spent eleven years building from a two-person consultancy into a company with a recurring client base and a staff of forty-three. The buyer was a regional private equity group with a tidy portfolio and a reputation for operational competence. Marcus’s M&A advisor had run a disciplined process. The purchase agreement was over two hundred pages. The lawyers on both sides had billed impressively for six months of diligence, redlines, and late-night calls.
Four million dollars landed. And then Marcus waited.
The deal, as structured, was worth eight million dollars total. Half at closing. Half contingent on the company hitting revenue targets over the following twenty-four months. A clean, symmetrical number — a coin flip between what Marcus could touch immediately and what he would earn if the business performed as he knew it could. His advisor had briefed him on the risk. His attorney had negotiated a handful of protective covenants. Everyone shook hands over a lunch that felt like a celebration.
What nobody quite said out loud was the part that happens next: that the earn-out is not a payment deferred — it is a claim waiting to be contested.
The architecture of optimism
To understand how an earn-out can fail, you first need to understand why it exists. An earn-out can mitigate risk for the buyer, while giving the seller an opportunity to enhance the aggregate consideration. That is the deal’s stated logic: a bridge between two honest disagreements about what a business is worth.
Marcus believed his company was worth eight million dollars. The PE group thought the recurring revenue base was promising but not yet proven under new ownership. They weren’t wrong to have doubts — they simply couldn’t price them. The parties use earn-outs when there is uncertainty about the target’s future performance, and the buyer is hesitant to pay the full purchase price up front. So both sides settled on a mechanism that appeared to solve the problem: defer the disagreement, and let the numbers decide.
It is a seductive framework. In practice, it transfers the valuation dispute from negotiation, where both parties have leverage, into post-closing operations, where the power has already shifted. Once the deal closes, the buyer controls the business. The seller controls nothing but a contractual right to be paid if certain metrics are achieved — metrics that the buyer now has the greatest influence over.
In Vice Chancellor J. Travis Laster of the Delaware Court of Chancery’s words: “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.”
That is not an indictment of earn-outs as a concept. They are a legitimate and sometimes necessary deal structure. The M&A market has witnessed a major increase in the use of earn-out deal terms, with the number of deals with earnout provisions jumping from around 20% to 33% between 2021 and 2023. They are embedded in the DNA of private M&A. But as their use has grown, so has the body of evidence about what goes wrong — and the numbers are not flattering.
What the data actually says
Marcus had been told that earn-outs were standard. He had not been told the full picture of how often they pay out.
Recent SRS Acquiom M&A data shows that earnouts achieve about 21 cents on the dollar and are contested at least 28% of the time. Read that again: the average seller collects roughly one-fifth of their contingent consideration. Of the 59% of deals that paid anything on the earnout, 17% of them required the earnout to be renegotiated to avoid litigation. So among sellers who received something, a substantial proportion only received it after a protracted fight or a forced compromise. The raw number — eight million dollars on paper — routinely becomes something closer to four million in practice, or five if the seller presses hard, or less if the business encounters headwinds that the contract couldn’t anticipate.
While seemingly an elegant solution to a valuation disconnect, earnouts often lead to disputes between the seller and buyer as to whether the earnout was in fact earned or whether the buyer improperly prevented the earnout from being maximized. In fact, a recent study found that less than 60% of deals with an earnout resulted in either a partial or full payment.
That statistic deserves to be read not as a warning label, but as a structural reality. More than four in ten earn-outs produce nothing for the seller. Not because the business necessarily failed — but because the conditions under which performance is measured, and the entity doing the measuring, have fundamentally changed.
Publicly available M&A dispute surveys consistently show that a substantial percentage — up to 26% — of earn-out transactions end up in formal post-closing disputes. Formal disputes mean lawyers, accountants retained as expert witnesses, depositions, arbitration hearings, and fees that can easily reach six figures before anything is resolved. And that number represents only the formal disputes — the ones where someone files a claim. The silent losses, the sellers who quietly accept a fraction of what they were owed rather than spend two years in litigation, never appear in the data at all.
As the use of earn-outs has grown, so too has the frequency of post-closing disputes related to them. The number of U.S. lawsuits involving earnouts nearly doubled between Q1 of 2022 and Q1 of 2023.
Marcus’s twenty-four months
The first quarter under new ownership felt fine. Marcus remained on as an advisor — a common condition of earn-out deals, a form of institutional continuity that the buyer needed and the seller was obligated to provide. An earnout keeps founders engaged during the critical transition period when client retention is most vulnerable. He sat in on quarterly reviews, answered questions about key accounts, and watched the PE group begin to make their mark on the business.
The changes were small at first. A new finance director, brought in from outside, began reclassifying certain expenses. A shared services arrangement was implemented across the portfolio — the acquired firm would now pay an allocation for HR, IT infrastructure, and legal support that it had never paid before. These weren’t unreasonable decisions in isolation. In aggregate, they were quietly catastrophic to Marcus’s earn-out.
As one M&A advisor has noted, “sellers are rightfully concerned about whether they truly control the P&L statement during the earnout period. If the acquirer decides to allocate more corporate overhead to your agency, hire expensive new team members, or invest heavily in experimental marketing channels, those decisions reduce EBITDA but may be entirely outside your control.”
This was Marcus’s reality. The metric in his earn-out agreement was EBITDA — the most popular earnout metric, with revenue close behind — and EBITDA is precisely the number most exposed to manipulation through overhead allocation, expense timing, and accounting policy choices. An American Bar Association study reports that 50%–70% of earnout provisions will use EBITDA or revenue as the principal earnout metric. Financial terms can be a major cause of post-closing disputes because of the inherent flexibility in most accounting standards.
By month eight, Marcus’s advisor ran a back-of-envelope calculation: if the overhead allocations continued at their current rate, the firm’s reported EBITDA for the earn-out period would fall roughly twelve percent below the threshold. That twelve percent was the difference between a payment and nothing — because his earn-out had a cliff structure. Below the revenue threshold, the earn-out paid zero. Cliff earnouts pay nothing unless a minimum performance threshold is achieved. Marcus had agreed to a binary outcome without fully appreciating what “binary” felt like when it was your money.
The business was genuinely doing well. Revenue was up. Clients had renewed. Two new accounts had been onboarded. But the number that appeared on the earn-out calculation — the one the buyer prepared and delivered — told a different story.
The machinery of measurement
Here is where the architecture of an earn-out reveals its deepest tensions. Performance is measured by the buyer. The methodology is established in the purchase agreement. And the purchase agreement was drafted six months ago, during diligence, by lawyers who could not anticipate every accounting decision the buyer would make after closing.
Dispute risk is a central feature of earn-out structures. Disagreements often arise over the interpretation of earn-out terms, the calculation of performance metrics, and the impact of management conduct on business outcomes. These disputes can damage the buyer-seller relationship, delay the final payment of consideration, and result in costly litigation.
Marcus’s purchase agreement contained what his attorney had described as “standard” protective language: the buyer would operate the business consistent with past practice, and would not take actions intended to frustrate the earn-out. According to the ABA Private Target Mergers & Acquisitions Deal Points Study, 25% of transactions that included earn-outs contained at least one post-closing covenant protecting earn-out performance, while 58% contained some other language protecting the seller’s right to the earn-out, including commercially reasonable efforts provisions and covenants against bad faith actions.
But protective language is not the same as protection. Given the difficulty of enforcing an earnout clause through litigation, it is especially important that sellers have confidence that the buyer will live by its bargain. The covenants in Marcus’s agreement were broadly worded. They did not define, with the precision required, which overhead allocations were permissible and which were not. They did not name an independent accountant who would be empowered to adjudicate disputes. They did not set a timeline within which the buyer had to deliver its earn-out calculation for each period. Without named-auditor language, buyers stall for years.
The buyer delivered the Year 1 EBITDA statement eleven weeks late. The statement showed the business had missed the threshold by a margin of nine percent, after allocations. Marcus’s attorney sent a formal objection. The buyer’s legal team responded with a twelve-page letter citing the accounting principles section of the purchase agreement. Both sides were technically correct about something. Neither side was wrong enough to make the litigation calculus simple.
For sellers, the “parade of horribles” plays out as follows: the transaction closes, the target company actually performs during the earn-out period, and yet the seller never actually receives any — or a material portion of — their earn-out consideration.
The broker’s exposure
Marcus’s story is the seller’s story. But the broker who worked this deal — call her Denise, a seasoned M&A intermediary who had advised on dozens of transactions in the lower middle market — had her own exposure, of a different kind.
Denise had negotiated a success fee of approximately eight percent of total transaction consideration. Typical business broker fees range from 10–15% of the business sales price up to about $1,000,000, with a reduced percentage above that. On an eight-million-dollar deal, that was a meaningful fee — one that had required a year of her life, considerable investment in advisory support, and the kind of professional credibility that takes decades to build and can erode quickly if a deal sours publicly.
The fee structure, as Denise had negotiated it, tracked the consideration. The upfront payment triggered one portion; the earn-out, if it paid, triggered the rest. Business brokers typically get paid at closing, though a well-drafted engagement letter should address when the broker expects to be paid on any contingent or future payments the seller will receive from the buyer, like promissory notes, indemnity holdbacks, and performance-based earnouts.
Denise had addressed this in her engagement letter — the earn-out portion of her fee would be payable when and if the earn-out paid. It was a reasonable provision. It was also, in retrospect, a mechanism that exposed her to the same uncertainty the seller was facing. If Marcus collected nothing on the back half of the deal, neither would she. She had effectively underwritten part of the contingent risk herself, without calling it that.
This is not an unusual position for an intermediary to be in. The business seller generally pays the broker fees to the sell-side broker, and where there are both sell-side and buy-side brokers, the brokers typically split the sell-side commission between them at no extra cost to the seller. The division is clean in theory. In practice, when a deal includes deferred consideration, the professionals who brokered it often find themselves waiting alongside their clients.
Denise had spent twelve months on this deal. She had invested her own capital — in time, in opportunity cost, in out-of-pocket advisory expenses. The upfront commission had covered her costs and generated a fair return. The earn-out commission was supposed to be the reward for placing a deal with strong upside. Instead, it became a live question that would take another eighteen months to answer, and might ultimately answer itself with a zero.
Waiting as a professional condition
There is a particular kind of professional frustration that comes not from losing a deal, but from closing one and still not knowing what it was worth.
The median earn-out potential is 32% of the closing payment. That is, for a deal with a meaningful earn-out, roughly a third of additional consideration hangs in the balance after closing — after the champagne, after the handshakes, after the press release the buyer issued celebrating the acquisition. The deal is announced as complete. The money is not.
The median length for the earn-out performance period for transactions outside the life sciences sector is 24 months. Two years. During that time, the seller waits, the intermediary waits, and any co-advisor or referral partner who is owed a portion of the success fee waits. As time increases, so do market and business uncertainties. The business that was healthy at close may be stressed by the time the earn-out period ends. The market conditions that justified optimistic projections may have shifted. And the relationship between buyer and seller — which was transactional even when it was cordial — can deteriorate under the weight of competing financial interests.
Earn-outs can influence the conduct of both parties. During the earn-out period, short-term decisions may be prioritized differently than in a deal without an earn-out, potentially impacting the long-term development of the acquired business and the earn-out metrics. The buyer has an incentive to manage expenses in a way that protects their return. The seller has an incentive to push revenue recognition as far forward as possible. Both of these behaviors can corrupt the integrity of the metric that is supposed to objectively determine the payment.
In negotiating commercial contracts, the buyer may have an incentive to structure deals with customers or suppliers in a way that defers revenue or accelerates costs. Similarly, the buyer may be motivated to accelerate investments by the acquired company — capital expenditure, marketing, or research and development — in ways that depress the earn-out metric.
And such moves may not always be deliberate. An example of an unintentional impact is when the parent company is compelled to increase corporate overhead across the board, with the knock-on effect of reducing the seller’s earnout driver, EBITDA. Intent is almost beside the point. The result is the same: the metric declines, and the payment doesn’t arrive.
The resolution
By month seventeen, Marcus had retained a forensic accountant. The accountant’s analysis — which took eight weeks and cost $40,000 in fees — identified specific overhead allocations that, in the accountant’s professional opinion, were inconsistent with the purchase agreement’s definition of “past practice.” The allocations related to a new enterprise IT system the buyer had implemented across all portfolio companies. Marcus’s firm had been charged for its share of implementation costs and ongoing licensing — costs that had not existed in any prior period and that, in the accountant’s view, had no basis in the historical accounting.
The dispute resolution clause in the purchase agreement was a standard arbitration provision — the kind that referenced applicable earn-out metrics, earn-out period, payout formula, and measurement standard. It did not name a specific accountant or a specific arbitration panel. It did not specify a timeline. It said the parties would endeavor to resolve disputes through negotiation, and if unable to do so, would submit to binding arbitration in the deal’s governing jurisdiction.
Arbitration took eleven months. Preparation took six months before that. Total legal and professional fees on Marcus’s side: approximately $180,000. He recovered a modified earn-out payment of $1.4 million — roughly 35 cents on his originally projected $4 million earn-out dollar. Including the fees, his net recovery from the earn-out was about $1.22 million. On paper, his eight-million-dollar deal netted him closer to $5.2 million over the full three-year saga that followed closing.
Denise collected her portion of the modified success fee — a number that, after her own professional expenses during the dispute period, represented a fraction of what she had expected when the deal closed. The co-advisor she had brought in to assist with the process, who had been promised a percentage of Denise’s fee upon earn-out payment, collected his portion by wire — a transaction that should have taken minutes but instead took the better part of a week to coordinate across three institutions, given that the settlement funds had passed through the buyer’s counsel, into the arbitration administrator’s account, and back out through Marcus’s attorney before anyone could split what remained. The mechanics of moving the money were the last, quiet indignity of a deal that had been delayed at every turn.
The earn-out and the moment of actual settlement
The earn-out dispute, for all its legal drama, was really about a simpler and more fundamental question: when is the deal actually done?
The conventional answer — the legal answer — is that the deal is done when the purchase agreement is executed and the closing conditions are satisfied. But the financial answer is different. The deal is not done until every wallet that is supposed to receive consideration has received it. For a seller, that means the earn-out. For an advisor, that means the final commission tranche. For a co-broker or referral partner owed a portion of the success fee, that means a share that is contingent on every other piece falling into place first.
The traditional infrastructure for moving deal money — wires routed through attorneys, instructions issued by email, commission splits processed by hand through brokerage accounting systems — was built for a world where deals closed cleanly and consideration was singular. An earn-out breaks every assumption that infrastructure makes. The money is not a single event; it is a sequence of contingent events. And each event in that sequence creates a new opportunity for delay, error, dispute, or the kind of quiet attrition that leaves professionals waiting for months when they should have been paid weeks ago.
Some advisors working with this reality have begun treating the settlement mechanics of a deal as a distinct professional problem — one that deserves as much attention as the deal structure itself. The question is not just “how is the earn-out calculated?” but “when the earn-out is finally determined and paid, how does the money actually move, and who is responsible for splitting it correctly among every party who is owed a share?”
For the upfront consideration — the closing payment that Marcus received on that Tuesday morning — this was handled by the closing attorney and the title company. Funds moved according to a settlement statement. Each recipient was identified, each amount was specified. The process was imperfect, but it was at least structured.
For the earn-out payment, seventeen months later, there was no equivalent structure. The money moved through arbitration administrators, through counsel, through Marcus’s personal accounts, and then outward to Denise, and then outward again to Denise’s co-advisor — each step requiring a separate instruction, a separate wire, a separate confirmation. Each step introduced delay. In one case, a wire failed because the receiving institution had updated its routing information. The correction took four business days. At that point, it was almost funny.
This is the operational reality that deal professionals live with: the legal machinery that determines who gets paid is sophisticated, expensive, and well-litigated. The financial machinery that actually moves the money to the right wallets, in the right amounts, at the right moment, is frequently improvised. It is treated as an afterthought — something that gets sorted in the days after a decision is made, through emails and phone calls and manual wire instructions that have to be re-verified every time anyone makes a change.
When a deal closes cleanly and consideration is a single number paid to a single seller, the improvisation is manageable. When a deal involves split commissions, referral arrangements, co-brokers, and contingent consideration, the improvisation becomes a liability. And when that contingent consideration is finally resolved — through negotiation or arbitration or the slow expiration of a dispute window — there is no infrastructure standing ready to execute the distribution. There is only a set of instructions that someone has to write, manually, and hope nobody makes a mistake.
The professionals who move money in a deal — advisors, brokers, closing attorneys — deserve better than that. The moment a deal resolves, however it resolves, the money should know where to go. Every wallet should be identified in advance. Every split should be pre-specified. When the determination is made, the payment should execute immediately, in one transaction, without anyone needing to re-negotiate the mechanics in real time under the exhausted, fractious conditions that typically follow a protracted earn-out dispute.
That kind of infrastructure exists now. Tools like Shaka allow deal professionals to configure the payment routing in advance — who receives what percentage, and to which wallet — so that when the moment of settlement finally arrives, the money moves instantly and completely. No coordination calls. No manual wires to three separate institutions. No four-day delay because a routing number changed. The deal closed; the funds land.
For Denise, who had waited eighteen months for her earn-out commission and spent three of them trying to confirm a wire that should have taken an afternoon, that kind of certainty would have changed the texture of the whole experience. Not the litigation — that was baked into the deal structure years before she could address it. But the settlement itself, the moment when everything was finally over and the money was finally moving — that should have been the easy part. For a deal professional who has done the work, survived the fight, and earned the fee, the payment at the end should be the one thing that goes right without effort.
What Marcus learned
Marcus sold his company for eight million dollars. He collected roughly five million, after professional fees, over three years. The earn-out did not pay out the way anyone had projected when they shook hands at that celebratory lunch.
He is not unusual. Only 55% of sellers realize any earnout compensation. The fault lies in seller overconfidence during the rush toward close, and in post-close disputes over ambiguous terms, or even cases where the buyer moved the goal posts.
What Marcus would tell you now — the lesson he carries forward from eleven years of building a company and three years of litigating over its sale price — is not that earn-outs are corrupt or that buyers are adversarial. Most buyers are rational actors pursuing their own interests within the terms of the agreement, just as sellers are. The problem is that the agreement, however carefully drafted, is a static document trying to govern a dynamic situation. The business will change. The market will change. The buyer’s strategic priorities will change. One of the primary reasons deal parties include an earnout is because they have different opinions about the value of the target business. This difference of opinion will not be easier to manage over time.
What Marcus would tell you is this: get as much as you can at closing, in a form that doesn’t require anyone’s future cooperation to receive. Negotiate the earn-out provisions with the same ferocity you would apply to the upfront price. Name the accountant who will adjudicate disputes before you need one. Build a dispute resolution timeline into the contract, not just a process. And when the settlement finally comes — however long it takes, however attenuated — make sure the mechanics of payment are as unambiguous and as instant as the deal itself deserved to be from the beginning.
The money should move the moment the deal is done. In M&A, that principle gets tested every time someone defers consideration into an earn-out. In the payment of that earn-out — whenever it finally, grudgingly arrives — it should be honored without exception.
