The first offer felt insulting, which is one way a founder knows the process has become real. The buyer was not arguing about the last three years. The EBITDA was what it was. The argument was about the next two: the renewal that had not been signed yet, the new program that had only started sampling, the customer relationship that still lived mostly in the founder's calendar and head.
That is the territory where earnouts show up. Not in broken businesses. In businesses where the seller sees momentum and the buyer sees uncertainty.
Most people hear "earnout" and think the buyer is pushing risk back on the seller. Sometimes that is exactly what is happening. But that is not the whole story. A well-built earnout is often a fair way to bridge a real valuation gap and get a seller paid for being right about the future.
As we covered in The Founder's Guide to Selling a Manufacturing Business, the gap between a strong business and a strong deal is usually uncertainty. Earnouts are one way the market prices that uncertainty. The question is not whether an earnout is good or bad in the abstract. The question is whether the structure gives the seller a fair chance to earn it.
The structure is more common than many founders realize. The SRS Acquiom 2024 M&A Deal Terms Study says one-third of private-target M&A deals now carry an earnout provision. RSM US, citing the same SRS dataset, notes that nearly one-third of non-life-sciences deals used earnouts in 2023, up from 21 percent the year before. This is not exotic paper. It is standard deal machinery when buyers and sellers disagree about what tomorrow is worth.
That matters in founder-led industrial businesses. In the kinds of companies HarborWind looks for, value often sits in customer history, technical know-how, and operating discipline that a buyer cannot fully prove at signing. That does not make the value imaginary. It just makes it harder to underwrite in cash on day one.
An earnout is a deal structure where part of the purchase price is paid after closing if the business hits agreed performance targets. In practice, it lets buyer and seller split the difference between what can be proven today and what the seller believes the business will deliver after the deal closes.
For business owners weighing an exit, that matters because an earnout can preserve headline value when the next chapter of growth is visible to the seller but not fully underwritten by the buyer yet.
The numbers are straightforward. RSM US reports that earnouts typically account for 10 to 25 percent of purchase price and usually run one to three years. The same piece says 64 percent of private-company earnouts in 2023 used revenue as the metric, while 23 percent used EBITDA.
That revenue tilt is not an accident. Revenue sits higher on the income statement and is less exposed to a buyer's post-close decisions about overhead allocation, hiring pace, systems costs, or integration charges. The Harvard Law School Forum on Corporate Governance makes the same point plainly: sellers generally prefer revenue-based targets because they are less vulnerable to cost-structure changes and accounting treatment after closing.
An earnout is not deferred cash. It is a second negotiation about who controls the road between signing and payout.
An earnout tends to work in a seller's favor when the target is clear, the clock is short, and the buyer's post-close freedom is not unlimited. In other words, the seller is not just betting on the business. The seller is negotiating the rules of the bet.
That distinction matters because payout is far from automatic. In SRS Acquiom's earnouts overview, recent M&A data shows earnouts achieve about 21 cents on the dollar across all earnout deals, are contested at least 28 percent of the time, and only 59 percent of deals pay anything at all on the earnout. Even among the deals that did pay, 17 percent had to be renegotiated to avoid litigation.
Those numbers do not mean earnouts are broken. They mean vague earnouts are expensive. A seller should be wary when the earnout is described as "straightforward" while the metric definitions, examples, reporting package, and dispute process are still fuzzy. That is usually a sign that the hard part has been deferred rather than solved.
Duration matters, too. Harvard's 2025 analysis notes that the median earnout period outside life sciences is 24 months, and it also warns that the larger the earnout and the longer the duration, the more likely a dispute becomes. A two-year earnout is not painless, but it is easier to protect than a four-year promise living inside a business the buyer may already be reshaping.
Earnouts that pay usually share the same backbone: precise definitions, partial-credit economics, and explicit operating covenants. If any one of those is missing, the seller is relying on goodwill where the contract should be doing the work.
First, define the metric like someone will argue about it later. Because they might. Harvard's 2023 earnouts update says the most common disputes are not abstract fights about fairness. They are disputes over metric calculations, trigger definitions, and, most often, the seller's rights and the buyer's obligations in operating the business during the earnout period. If revenue from a legacy customer is booked through a new legal entity, does it count. If the buyer bundles your product into another division, does that count. If a customer is pushed to a different sales channel, who gets credit. Those answers belong in the agreement, not in a tense meeting nine months later.
Second, avoid all-or-nothing structures when the business does not operate that way. If the target is $10 million of revenue and the business delivers $9.8 million, an earnout that pays zero is not reflecting economics. It is reflecting bad architecture. Tiered payouts, floors, and accelerators are not seller indulgences. They are a way to keep the earnout tied to real performance instead of a single hard cliff.
Third, get specific about how the buyer can run the business. This is where many founders get too trusting. Delaware courts will enforce the contract as written. Harvard's 2023 summary notes that, absent explicit language, buyers generally have no implied duty to take steps to maximize an earnout. The 2025 analysis adds that only 25 percent of earnout deals in the ABA study included at least one strong post-closing covenant such as operating consistent with past practice, maximizing the earnout, or running the business as a stand-alone division.
That means the seller cannot assume protection is "market" if it is not written down. If the business needs pricing continuity, sales-team continuity, dedicated books, or limits on product-line reshuffling to hit the target, that should be said directly. Clear examples help. So do reporting rights and a defined dispute process. None of this is combative. It is how an earnout becomes a pricing tool instead of a trust exercise.
HarborWind Partners approaches earnouts as alignment tools and valuation bridges, not as a way to promise one price and quietly pay another. Sean Mahoney's operator background and Rocky Lopez's investing discipline point to the same conclusion: if a founder is taking real post-close risk, the scorecard has to be understandable, measurable, and fair.
That is especially true in specialty chemicals, niche manufacturing, and industrial B2B services, where value often comes from things an outside buyer needs time to learn. A short earnout tied to the right metric can bridge that knowledge gap without pretending it does not exist.
Our broader view on buyer fit, continuity, and long-term ownership is in Why We Buy Founder-Led Industrial Businesses.
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