2Bobs—with David C. Baker and Blair Enns Understanding Earnouts
Oct 22, 2025
Selling your firm? Understanding earnouts is crucial! Learn how these deferred payments work and why they matter. Discover key components like time periods and payment formulas, and explore typical metrics that dictate success. The podcast highlights tips for simplifying earnout incentives and avoiding pitfalls like cliff targets. Key strategies for managing post-acquisition expectations are discussed, along with protecting yourself if the buyer falters. Gain insights into evaluating offers and why some sellers prefer longer earnouts to stay involved.
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Earnout Defined And Purpose
- An earnout splits a sale into cash now and contingent payments later based on performance.
- It transfers some risk to the seller while incentivizing post-sale performance.
Earnouts Are A Recent, Shrinking Trend
- Earnouts became common about 40–45 years ago and evolved from longer to shorter terms.
- Modern earnouts typically last one to three years rather than five.
Specify The Three Core Elements
- Clarify three core earnout elements: time period, payment formula, and dependencies.
- Keep these elements simple and focused to avoid needless complexity.
