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Why 60%+ of Deals Now Include Contingent Consideration—And Only 21% Gets Paid
By Brett Vogeler
Let's cut to the chase: If you're selling a business in 2026 and your offer doesn't include an earnout, you're either leaving money on the table or working with an unsophisticated buyer. Earnouts aren't the exception anymore—they're the rule. And if you don't understand how they work, you're about to get educated the expensive way.
Here's the part nobody tells you until it's too late: Only 21 cents on every earnout dollar actually gets paid. That $10 million offer with a $3 million earnout? It's really an $8.4 million deal. And 28% of earnouts end in disputes that make Thanksgiving dinner with your in-laws look pleasant.
SECTION 1: THE NUMBERS DON'T LIE
Key Market Statistics
📈 20% ➔ 33% Growth in deal earnouts from 2021 to 2023
📈 40-50% Expected deals with earnouts in 2026+
💰 21% Of earnout potential actually gets paid
⚖️ 28% Of earnouts are contested (disputes)
🔄 17% Require renegotiation to avoid litigation
⏱️ 24 Months Median earnout period (down from 36+)
💵 32% Median earnout size (% of closing payment)
SECTION 2: WHY EARNOUTS BECAME THE NEW NORMAL
1. The Valuation Gap Crisis
Multiples dropped from an average of 11.9x (2016-2021) to 9.8x (2022-2024). Sellers still remember 2021 prices, but buyers are pricing based on the 2024-2026 reality. Earnouts bridge this fundamental disconnect: "I'll pay your number—if you prove it." It allows both parties to sign the deal believing they got what they wanted.
2. Risk Mitigation for Cautious Buyers
Buyers are using earnouts to hedge against specific uncertainties:
Overstated projections: Protecting against hockey-stick growth charts that don't materialize.
Customer concentration risk: Ensuring key accounts stay post-close.
Management transition uncertainty: Incentivizing sellers to ensure a smooth handoff.
Market volatility: Buffering against supply chain fragility and economic shifts.
Integration risk: Critical for search funds and first-time buyers who need operational stability.
3. Financing Constraints
Cash-strapped buyers—particularly micro-PE firms, search funds, and individual acquirers—are using earnouts to reduce the cash required at closing. Lenders actually prefer earnouts as a risk mitigation tool, as it aligns incentives. Even SBA loans now accommodate earnout structures, making them accessible for Main Street and lower middle-market deals.
SECTION 3: COMMON EARNOUT STRUCTURES
Structure Type | % of 2024 Deals | Best For | Risk Level |
|---|---|---|---|
Revenue-based | 62% | Easy measurement, less manipulation | Medium |
EBITDA-based | 22% | Value alignment, but accounting disputes | High |
Milestone-based | - | FDA, customer retention, product launch | Low |
Hybrid | 68% | Complex businesses, multi-year goals | High |
Deal Context Matters:
Typical earnout: 20-50% of total purchase price
Duration: 18-36 months (median 24 months trending)
<$5M deals: 30-50% earnout (Higher risk = larger contingent portion)
$5M-$25M deals: 20-35% earnout
$25M+ deals: 15-25% earnout
SECTION 4: RED FLAGS & DISPUTE TRIGGERS
🚩 RED FLAGS FOR SELLERS
Buyer controls all operational decisions affecting earnout
No information rights or audit provisions
EBITDA-based without pre-agreed accounting policies
Long duration (3+ years)
No "bad faith" or "no manipulation" covenant
Set-off rights allowing earnout reduction for unrelated claims
Employment tied to earnout (fired = forfeit)
Vague metrics like "commercially reasonable efforts"
⚠️ COMMON DISPUTE TRIGGERS
EBITDA calculation disputes (accounting policy changes)
Buyer redirects resources away from earnout-critical activities
Strategy changes during earnout period
Information asymmetry (seller has no visibility)
Vague or undefined performance metrics
Integration expenses allocated against earnout
SECTION 5: THE HARSH REALITY: DISCOUNT YOUR EXPECTATIONS
THE EARNOUT DISCOUNT MATH
Earnout Amount:$1,000,000
× Average Achievement Rate:21%
= Expected Value:$210,000
× Risk/Time Discount (50-70%):60%
REAL VALUE: $84,000 - $126,000
Translation: Your $1M earnout is worth about $100K in today's dollars.
SECTION 6: BEST PRACTICES FOR STRUCTURING EARNOUTS THAT WORK
Use Objective, Measurable Metrics
Revenue (clear, hard to dispute) over EBITDA
Third-party milestones (FDA approval, regulatory certification)
Customer retention rates with specific definitions
Avoid "commercially reasonable efforts" language
Lock Down Accounting Policies Upfront
GAAP-consistent with seller's historical practices
Pre-agreed normalization rules
Working capital treatment aligned
Independent accountant for disputes (binding)
Balance Control with Protection
"No manipulation" covenant
Reasonable support commitment (budget, resources)
Information rights (monthly/quarterly reporting)
Audit rights with book access
Keep It Short and Simple
18-24 months preferred over 3-5 years
Single metric easier than multiple stacked
Annual payments better than lump sum
Clear dispute resolution (arbitration, independent accountant)
Document Everything
Sample calculations in purchase agreement
Baseline financials agreed at closing
Reporting templates and schedules
Dispute resolution process with timelines
SECTION 7: WHAT SELLERS MUST KNOW
10 QUESTIONS SELLERS MUST ASK BEFORE SIGNING
☑️1. "What % of your previous deals paid full earnouts?"
☑️2. "Can I speak with sellers from your past acquisitions?"
☑️3. "What information will I receive monthly/quarterly?"
☑️4. "Who calculates the earnout—and who audits it?"
☑️5. "What happens if you change strategy during earnout period?"
☑️6. "What are my audit rights?"
☑️7. "Is there a 'no manipulation' covenant?"
☑️8. "What's the dispute resolution process?"
☑️9. "Can earnout be offset against indemnity claims?"
☑️10. "What happens if I'm terminated during the earnout period?"
SECTION 8: WHAT BUYERS SHOULD DO
Strategic Uses of Earnouts
✅ Reduce upfront cash for capital-constrained buyers
✅ Align seller incentives post-close
✅ Test projections before paying full price
✅ Retain key talent (seller stays to earn)
✅ Manage integration risk (phased payments)
How to Structure to Actually Get Paid
Set realistic targets (80% probability of hitting baseline)
Provide transparency (regular reporting builds trust)
Honor the spirit of the deal (don't game the system)
Allow reasonable seller input on earnout-critical decisions
Pay promptly when earned (builds reputation)
SECTION 9: WHAT BROKERS NEED TO MASTER
THE BROKER'S EARNOUT PLAYBOOK
✓ Educate sellers on earnout realities (not promises)
✓ Negotiate strong protections (information rights, no-manipulation)
✓ Push for objective metrics (revenue > EBITDA)
✓ Keep earnouts short (18-24 months max)
✓ Document everything (accounting policies, dispute resolution)
✓ Discount earnout value in expectations (21% reality)
✓ Build buyer database tracking earnout payment history
✓ Include earnout terms in LOI (don't wait for definitive)
SECTION 10: LOOKING AHEAD TO 2026 AND BEYOND
🔮 EARNOUT TRENDS FOR 2026-2027:
Prevalence will reach 40-50% of all deals (up from 33%)
Shorter earnout periods (18 months becoming standard)
Revenue-based will dominate over EBITDA (70%+ of deals)
Technology-enabled tracking and reporting (blockchain, smart contracts)
Increased use of third-party earnout administrators
More sophisticated seller protections (lessons learned from disputes)
Rise of earnout insurance products
Greater regulatory scrutiny of earnout structures
Why This Matters Now
The M&A landscape is fundamentally shifting. The valuation gap between the 2021 peak and current reality persists, necessitating creative deal structures. The explosive growth of Micro-PE and search funds—buyers often capital-constrained—is driving earnout prevalence. Add in supply chain uncertainties and the generational wealth transfer increasing seller sophistication, and it's clear: the earnout is no longer a "nice to have," it's the gear that makes the deal engine turn.
SECTION 11: THE BOTTOM LINE
📌 FOR SELLERS"Assume your earnout is worth 20-30% of face value when evaluating offers. Negotiate hard on protections, not just percentage. Get everything in writing. Consider all-cash offers at lower valuations vs. higher offers with large earnouts."
📌 FOR BUYERS"Earnouts are risk insurance, not negotiating tricks. Structure them fairly with realistic targets. Provide transparency and pay promptly when earned. Your reputation matters—word spreads fast in the M&A community."
📌 FOR BROKERS"Master earnout structures or watch deals die in post-close disputes. Educate clients early, negotiate protections aggressively, and document everything. Your value-add in 2026 is earnout expertise, not just finding buyers."
The New Normal
Earnouts aren't going away—they're expanding. By 2026, nearly half of all lower middle-market deals will include contingent consideration. The winners will be sellers who negotiate strong protections, buyers who honor their commitments, and brokers who master the mechanics. The losers will be those who sign first and read later.
Welcome to the earnout era. Navigate it well, or pay the price.
About the Author: Brett Vogeler is a recognized expert in lower middle-market M&A, specializing in complex deal structuring and negotiation. He helps buyers and sellers navigate the evolving landscape of business transactions with data-driven insights and straight-shooting advice.
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