An earnout is not a price. It is a contingency. And the difference matters more than most sellers realize until it is too late.
When a buyer offers a headline number that includes an earnout component, the natural instinct is to add the numbers together and treat the total as the deal value. But an earnout is not guaranteed. It is conditional on future performance, measured against targets that may or may not be achievable, over a period during which the seller no longer controls the business.
This is the fundamental tension. The seller is being asked to bet on their ability to hit targets in an environment they no longer control. The buyer now makes decisions about hiring, pricing, product investment, and go-to-market strategy. Any of those decisions can affect whether the earnout targets are met.
Good earnout structures acknowledge this tension. They include protections for the seller: minimum investment commitments, restrictions on actions that could artificially suppress performance, clear definitions of how metrics are calculated, and dispute resolution mechanisms.
Bad earnout structures are vague. They reference revenue without defining what counts. They allow the buyer to restructure the business in ways that make targets unreachable.
The best advice for any seller facing an earnout is simple: negotiate as if you will never see the earnout money. Get the guaranteed consideration to a level you can live with. Then treat the earnout as upside, not as part of the base deal.
If the guaranteed portion is not enough, the deal is not good enough. An earnout should never be the reason you say yes.