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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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.
Metrics Reflect Buyer Concerns
- Buyers choose metrics based on their biggest fears about the acquisition.
- Metrics vary: top line, profitability, growth rate, retention, or specific milestones.
Record Why They Bought You
- Memorialize the buyer's reasons for acquisition early to align future expectations.
- Negotiate earnout targets that match what the buyer actually values, not ad-hoc profitability concerns.
