What is an Earn-Out?
An earn-out is part of a sale price that is paid after closing only if the business hits agreed targets. The buyer pays some of the price in cash at closing and promises the rest later, in one or more payments, if revenue, gross profit or EBITDA reaches set levels over a set period.
It bridges a gap in price. The seller believes the next two years will look like the last good one; the buyer is not sure. The earn-out lets both be right: the seller gets the higher number if the results arrive, and the buyer pays it only if they do.
How an Earn-Out Works for an Ecommerce Brand
Brands meet earn-outs most often when recent growth is hard to verify from history alone: a breakout year on Amazon or TikTok Shop, a new wholesale account still in its first season, or an owner whose relationships drive sales. The earn-out period usually runs one to three years after closing, and the seller often stays on to run the brand through it.
The hard part is that the seller no longer controls the levers. The buyer decides the ad budget, the inventory buys, which costs move onto the brand and how they are booked. An earn-out measured on EBITDA can shrink because the buyer allocates its own overhead to the brand, and one measured on revenue can be hit by a stock-out the seller did not choose. An earn-out is only as good as the buyer's ability to pay it, which is why sellers often ask what secures it.
What an Acquirer and a Seller Look At
An acquirer looks at how confident it is in the forecast and how much of the price it wants at risk. A seller looks at the definition of the metric, the accounting rules used to measure it, whether payment is all-or-nothing or scaled, what the buyer agrees to do or avoid during the period, and how a dispute is settled. How an earn-out is taxed and recorded depends on its structure, which a CPA and counsel set for the real deal.
Further Reading
How to Prepare and Sell Your Ecommerce Business
Formula
Total Price Received = Cash at Closing + Earn-Out Payments Earned
Scaled Payment (one common structure) = Maximum Payment × (Actual Result − Floor) ÷ (Target − Floor), paid in full at or above target and zero at or below the floor
Example
A buyer agrees to a $12M headline price for a brand: $9M in cash at closing and up to $3M in earn-out payments, $1.5M for each of the next two years. Each year pays in full if EBITDA reaches $2.5M, nothing at or below 80% of that target ($2.0M), and a scaled amount in between.
- Year 1 EBITDA: $2.6M, above target, so the full $1.5M is paid
- Year 2 EBITDA: $2.2M, which is 88% of target
- Year 2 payment: $1.5M × ($2.2M − $2.0M) ÷ ($2.5M − $2.0M) = $1.5M × 0.4 = $600,000
- Total received: $9M + $1.5M + $0.6M = $11.1M
The seller receives $11.1M of the $12M headline. The $900,000 gap came down to one year's EBITDA landing $300,000 short of target.
General education only, not legal, tax or investment advice; how a term applies to your brand depends on your own documents and advisers.