Earnouts: The Part of Your Price You Might Never See
A third of your deal can hinge on targets you no longer control. Here’s how to take that control back before you sign.
In January, the biggest earnout fight in American business finally ended. A $5.75 billion deal. Up to $2.35 billion sitting in earnout payments. Ten days of trial, then an appeal all the way to the Delaware Supreme Court. [1]
The buyer was Johnson & Johnson. The seller was a medical robotics company. But the lesson lands on every business owner who has ever been handed a letter of intent with the phrase “additional consideration” buried inside it.
What an earnout really is:
An earnout is the part of your price the buyer does not hand over at closing. You earn it later — if the business hits revenue or profit targets after you have already given up the keys.
Buyers like earnouts for a simple reason. They bridge the gap between your number and theirs. You believe the company is worth $100 million. They will pay $80 million today and another $20 million if you prove the rest. On paper, it looks like a fair split of the risk.
Here is the part that is not fair. Earnouts appear in roughly 18% to 24% of private company sales, and closer to 40% to 50% of deals under $100 million.[2] When one is in the deal, the median earnout now equals about 34% of the cash paid at closing. And across hundreds of closed transactions, earnouts pay out only about 21 cents on every dollar of their stated maximum. Roughly a quarter to a third pay nothing at all.[3]
So when a buyer raises their offer by adding an earnout, read it twice. They may not have raised your price. They may have moved a third of it somewhere you cannot reach.
Why sellers lose them:
Rarely fraud. Usually control.
After closing, you do not run the company. The buyer does — and the buyer controls nearly every lever your target depends on. They can move corporate overhead onto your books. They can let a profitable contract get signed one month after your measurement period closes. They can reassign the salesperson who brought in a third of your revenue. They can let your best manager go.
Wayne’s book is blunt about this: you have to protect your ability to earn the earnout before you sign, because you will not have the power to protect it afterward.[4]
Four protections worth real money:
1. Acceleration if your people are taken away. If the buyer fires you or a key employee without cause — or changes their pay, title, duties, or location badly enough that they quit — the full earnout should come due immediately. In one deal from the book, that single clause was worth an extra $5 million to the sellers.
2. A plain ban on cost loading. Write it in: the buyer cannot pile new overhead, allocations, or corporate charges onto your business during the earnout period.
3. Partial credit for near misses. If your target is 10% growth and you deliver 9.9%, most agreements pay you zero. Negotiate a sliding scale so anything above, say, 8% earns something.
4. Revenue instead of EBITDA, wherever you can get it. Revenue is far harder for a buyer to reshape than profit.
What January’s ruling changed ⚖️:
Most sellers assume that if a buyer behaves badly, a judge will step in. Every contract carries an implied duty of good faith and fair dealing, and sellers lean on it hard.
The Delaware Supreme Court just narrowed that safety net. It called the implied covenant a “narrow gap-filling tool of last resort” — not a license to rewrite a deal for a party who now believes they made a bad one. Where the contract had already assigned a risk, the court held both sides to their own words, even though that cost the sellers a milestone worth hundreds of millions.[5]
And yet the sellers still collected more than $1 billion. Not because a court felt sorry for them. Because they had negotiated an express clause requiring the buyer to use commercially reasonable efforts — and the buyer broke it.[6]
That is the whole lesson in one line: the protections you write down are worth money. The ones you assume are worth nothing.
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[1]Arnold & Porter, "Efforts and Earnouts: Lessons From Johnson & Johnson v. Fortis" (March 2026), https://www.arnoldporter.com/en/perspectives/advisories/2026/03/lessons-from-johnson-and-johnson-v-fortis
[2]Salt Creek Advisory, "Lower Middle Market M&A Outlook 2026", https://saltcreekadvisory.com/articles/lower-middle-market-ma-outlook-2026
[3]CT Acquisitions, "Founder Earnout Benchmarks by Deal Size (2026)," citing SRS Acquiom M&A Claims Insights and Deal Terms Studies, https://ctacquisitions.com/guides/founder-earnout-benchmarks-by-deal-size-2026/
[4]Wayne Zell, Your Multimillion Dollar Exit, Ch. 4, "Protecting Your Ability to Earn the Earnout", https://waynezell.com
[5]Reed Smith, "Delaware Supreme Court Explains the Limits of the Implied Covenant in an Earn-Out" (Feb. 26, 2026), https://www.reedsmith.com/our-insights/blogs/viewpoints/102mk8l/delaware-supreme-court-explains-the-limits-of-the-implied-covenant-in-an-earn-out/
[6]Mayer Brown, "Delaware Law Alert: New Perspectives on Earnouts" (Feb. 5, 2026), https://www.mayerbrown.com/en/insights/publications/2026/02/delaware-law-alert-new-perspectives-on-earnouts