Today’s SMB Manual explains how earnouts are paid, why sellers often receive less than expected, and which deal terms make targets achievable.
THE EARNOUT TRAP
A buyer offers $5.4 million for your commercial cleaning company, which generated $1.2 million in EBITDA last year. The offer is 4.5 times EBITDA, but only $4.2 million is paid at closing. The remaining $1.2 million is an earnout, payable if EBITDA reaches $1.4 million in the first 12 months after the sale. This means earnings must grow by almost 17% under the new owner.
The buyer controls pricing, staffing, suppliers, and expenses within the purchase agreement’s restrictions. The buyer also prepares the financial statements used to determine whether you qualify for the earnout. Your ability to challenge the result depends on the accounting rules, access rights, and dispute procedures you negotiate.
SRS Acquiom’s 2026 M&A Earnout and Milestone Trends report draws on four studies covering more than 4,000 deals. Earnouts appeared in 30% of 2025 lower middle-market deals, excluding life sciences, compared with 23% during 2014-2022. Among smaller deals with some earnout achievement, the median payout was 43 cents per potential dollar. Separately, an analysis of 100 non-life-sciences deals closed between 2021 and mid-2024 found that sellers had received 21% of aggregate maximum earnout dollars to date.
If you received 21% of the $1.2 million earnout, you’d collect $252,000, bringing the total sale price to $4.452 million, or 3.71 times EBITDA. Your actual payout would depend on the company’s performance under the buyer and the terms of your agreement.
Johnson & Johnson bought Auris Health for $3.4 billion upfront, with up to $2.35 billion more tied to milestones. The agreement required J&J to use commercially reasonable efforts to achieve those milestones. On January 12, 2026, the Delaware Supreme Court upheld findings that J&J breached its written obligations and committed fraud.
EBITDA targets expose sellers to operating expenses and accounting practices controlled by the buyer. Additional payroll, supplier costs, or overhead allocations can reduce the earnout, even when those decisions benefit the combined business.
In Prosser v. PharmaLogic Holdings Corp., the owners sold their business for $30 million in January 2021. They could have collected another $6.6 million if EBITDA reached $7 million, or just under $7.5 million, during the 12 months following July 1, 2021. The buyer reported EBITDA of $6.8 million.
The sellers alleged that the buyer reduced EBITDA by changing how it accounted for uncollectible customer bills, adding a 401(k) match and sales bonuses, and switching suppliers at an additional cost of more than $170,000. On July 7, 2026, the Delaware Superior Court allowed their breach-of-contract claim to proceed. The ruling meant the sellers could pursue their claim, more than five years after the sale.
The lesson is to tie the earnout to performance you can influence after the sale. If you’ll continue managing existing customer relationships, revenue from those accounts may be a suitable target. Gross profit, calculated as revenue minus the direct cost of serving customers, limits the effect of corporate overhead on your payout.
If the buyer insists on EBITDA, agree on the accounting policies and include examples showing how the earnout will be calculated. Negotiate exclusions for the buyer’s overhead allocations, management fees, integration expenses, and new employee benefits. State how changes to accounting policies or estimates will affect the result.
Restrict customer diversion and expense shifting. Require separate records, monthly statements, and access to supporting documents. Set calculation and payment deadlines. Negotiate payment of the full earnout if the business is sold or you are dismissed without cause. State which accounting disputes an independent accountant will decide and where claims of contractual breach or misconduct will be resolved.
An earnout extends the seller’s financial stake in a business after control has passed to the buyer. That arrangement can work when both sides agree on how the business will be run and how performance will be measured. The seller’s challenge is securing terms that keep the payout within reach as the buyer takes the company in a new direction.
WHAT WE’RE READING
SBE Council’s October Check Up found that 81% of small business owners are meeting or beating their 2026 financial targets. Their customers are pulling back, though. 36% report lower customer spending over the past six months, and 34% say buyers are trading down to cheaper options. Lack of access to capital now limits growth for 54% of owners, up from 43% in February, and gas and energy costs jumped from ninth to second among owner concerns. Read →
Clark Hill examines how the SBA’s proposed size standards could let larger companies compete for federal contracts reserved for small businesses. The changes would revise standards across 338 industry groups and industries, potentially helping contractors approaching the current size limits retain eligibility while exposing smaller firms to better-resourced competitors. Contractors have until November 20 to comment and should assess how the thresholds would change competition in their specific markets. Read →
