How to structure earn-out deals?

February 24, 2026

by a searcher from The University of Chicago - Booth School of Business in Boston, MA, USA

Hi all, my partner and I are growing our IT Services through M&A, and we need to learn fast on how to effectively structure earn-out deals (where a large part of the purchase price is paid later, based on the future performance of the business). We already have potential targets that are amenable to this structure, but we need to learn fast how do structure them properly. Can anyone advise do/don't or point us to lawyers with experience with this? Thanks.

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Reply by a searcher
from Northwestern University in Chicago, IL, USA

Depends what you're trying to address / de-risk. Earnouts can be tied to anything. Are you trying to solve for material client retention? Gross margin retention? Growth? Operational integration? Cross-sell? All of the above? My advice, from having structured a number of these during my corp dev days: 1) Maintain separate P&L for acquired Co's revenue & GP. Difficult to do this below GP, as you'll likely want to capture SG&A synergies post close. 2) Gross profit is the cleanest approach. Can be based on annual growth % targets achieved over and above an initial peg/starting off point OR specific GP $ targets with each threshold paying out a defined dollar amount once met. Make sure to define exactly how GP is calculated in your purchase agreement, so it's crystal clear and not up for interpretation. 3) Using Revenue - less desirable b/c new wins could potentially carry lower margin. You may not want to pay a premium for less profitable business.

Reply by an investor
from Wesleyan University in Dedham, MA, USA

I would think carefully about whether you want to create a structure where you reward a buyer discretely for financial performance of the assets they are selling you (most likely based on EBITDA of that individual asset which can be complex as requires separate set of books and to sort out economies of scale and transfer pricing) or if you just want to use equity in the holding company which is most frequently the root taken by many roll up strategies because it immediately puts the seller in the role of maximizing the value of the whole, as you are too, rather than their individual part which can be counter to your objectives. The biggest issue with equity in the holding company is convincing them of the value and liquidity of that down the road.

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