Earn-Out

An earn-out is a deal term under which part of a company's sale price is paid later, contingent on the business hitting agreed performance targets after closing. Instead of settling the full price on completion day, the buyer pays a portion upfront and promises further payments if the business achieves defined results, commonly revenue or profit targets measured over one to three years.

Earn-outs exist to bridge valuation gaps. A seller who believes the business is worth more than the buyer will pay today can capture that difference later, provided the results materialise. The trade-off is that the selling family remains economically exposed to a business it no longer controls, and the measurement of targets is a well-known source of post-closing disputes.

Why it matters for family offices

For a family that has just sold its operating company, the liquidity event is not complete at closing. The earn-out is a conditional asset: real enough to plan around, but not cash, and not guaranteed. It needs to appear in the family's net worth as a contingent receivable rather than being mentally counted as money in the bank. Families also often negotiate protections during the deal, such as covenants on how the buyer runs the business during the earn-out period and precise accounting definitions, because the buyer's post-closing choices can determine whether targets are met.

How it shows up in practice

Consider a family that sells its distribution business for a headline price of $100 million, with $75 million paid at closing and up to $25 million payable across two annual earn-out tranches tied to EBITDA targets (earnings before interest, taxes, depreciation, and amortisation). The family office records the closing proceeds as settled wealth and the earn-out as a separate conditional position with its measurement periods, caps, and expected payment dates. Each year it gathers the buyer's earn-out statement, checks it against the purchase agreement, and updates the position when a tranche pays out, lapses, or ends up in dispute. Keeping the earn-out visible in consolidated reporting, alongside its conditions, stops the family from either overstating its wealth or forgetting to chase a payment it is owed.