Why do strategic buyers almost always have earn-out as part of consideration when they buy an owner managed business?

Short answer: To mitigate risks and align the interests of buyers and sellers!  

Owner-managed businesses are unique entities, often deeply entrenched with the vision, expertise, and personal connections of their founders. When a strategic buyer acquires 100 percent of such a business, they aren't just purchasing assets; they're inheriting a legacy, along with all its intricacies and potential pitfalls.

Enter the earn-out! By structuring a portion of the acquisition payment as contingent on future performance, strategic buyers effectively hedge their bets against unforeseen turbulence during the transition period. This approach shields them from potential dips in performance and ensures the sustained success of the acquired business.

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Earn-outs can be a truly valuable tool for both buyers and sellers, helping to address uncertainties and facilitate a successful transition.

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One of the most compelling aspects of earn-outs is their ability to foster alignment between sellers and buyers. For buyers, earn-outs offer a strategic advantage by mitigating uncertainty. Instead of shelling out the entire sale price upfront, they spread the risk, paying a portion immediately and the rest based on future performance. This not only helps to bridge valuation gaps but also injects a dose of confidence into the deal, reassuring both parties of its financial viability.

But it's not just the buyers who stand to gain. Picture this: the seller, having poured their heart and soul into building their business, wants to ensure its continued prosperity even after selling their company. The earn-out mechanism provides the incentive. With their final payout contingent upon achieving predefined performance metrics, the seller becomes deeply invested in the post-acquisition trajectory of the business.

Overall, earn-outs can be a truly valuable tool for both buyers and sellers in acquisitions of owner managed businesses, helping to address uncertainties and facilitate a successful transition. 


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We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.