Earn-Outs in Plain English: How Deferred Consideration Really Works

Almost every professional services deal includes an earn-out: part of the price paid later, based on how the firm performs after completion. Done fairly, it aligns everyone. Done badly, it's a discount dressed up as a price. Here's how to tell the difference.

The basic mechanics

A typical practice deal might be structured as: a payment on completion, then one or more further payments over one to three years, adjusted against an agreed measure — usually client or fee retention. If the fees stick, you receive the full price. If clients leave, the later payments reduce.

The logic is legitimate: what a buyer is purchasing is relationships, and relationships transfer over time, not on completion day.

What a fair earn-out looks like

• A meaningful day-one payment. If the majority of the price is contingent, the buyer hasn't bought your firm — they've optioned it.
• Retention measured on fees, not profit. You can influence whether clients stay. You cannot control the buyer's cost decisions after completion — so profit-based earn-outs put your money behind someone else's management.
• Carve-outs for what you can't control. A client that dies, sells up, or is resigned by the buyer shouldn't count against you.
• A defined, short window. One to three years. Beyond that, performance reflects the buyer's stewardship, not your handover.
• Your continued involvement matched to the risk. If your money depends on retention, you need the access and authority to protect those relationships during the earn-out.

The clauses that quietly shift risk

Watch for: earn-outs contingent on the buyer's overall performance; unilateral rights to reprice or resign clients with no adjustment; "management conditions" that let the buyer withhold payment if you leave — even for health reasons; and vague definitions of recurring fees that get argued about in year two. None of these are standard. All of them appear in real term sheets.

Our approach

We use earn-outs — openly and mechanically simply, because we think alignment is healthy and ambiguity isn't. Fee-based measurement, sensible carve-outs, defined windows, and the structure explained in full before heads of terms. If you don't understand a clause in any buyer's offer, don't sign it. That rule alone will save you more than any negotiation tactic.