--- title: What Is an Earnout and Why It Might Work in Your Favor description: Learn how an earnout works in a manufacturing business sale, when it helps sellers, and how to negotiate terms. image: https://harborwind.com/hubfs/blog-images/earnout-explained-manufacturing-featured-20260802T143158Z-human_action-e7bfa2ed57d7.webp --- ![HarborWind Partners](https://harborwind.com/hubfs/raw_assets/public/harborwind-partners/images/logo-horizontal.svg) [![HarborWind Partners](https://harborwind.com/hubfs/raw_assets/public/harborwind-partners/images/logo-horizontal-white.svg?v=hwp16)](https://harborwind.com/) - [Home](https://harborwind.com) - [About](https://harborwind.com/about) - [Team](https://harborwind.com/team) - [Insights](https://harborwind.com/insights) - Industry Focus - [Our Investments](https://harborwind.com/portfolio) - [Investment Criteria](https://harborwind.com/investment-criteria) - [Specialty Chemicals](https://harborwind.com/specialty-chemicals) - [Industrials & Industrial Services](https://harborwind.com/niche-manufacturing) - [Essential B2B Services](https://harborwind.com/b2b-services) - [Portfolio](https://harborwind.com/portfolio) [Start a Conversation](https://harborwind.com/contact) [![HarborWind Partners](https://harborwind.com/hubfs/raw_assets/public/harborwind-partners/images/logo-horizontal-white.svg?v=hwp16)](https://harborwind.com/) × - [Home](https://harborwind.com) - [About](https://harborwind.com/about) - [Team](https://harborwind.com/team) - [Insights](https://harborwind.com/insights) - Industry Focus - [Our Investments](https://harborwind.com/portfolio) - [Investment Criteria](https://harborwind.com/investment-criteria) - [Specialty Chemicals](https://harborwind.com/specialty-chemicals) - [Industrials & Industrial Services](https://harborwind.com/niche-manufacturing) - [Essential B2B Services](https://harborwind.com/b2b-services) - [Portfolio](https://harborwind.com/portfolio) Start a Conversation 1. [Home](https://harborwind.com/) 2. What Is an Earnout and Why It Might Work in Your Favor A HarborWind Partners Publication Buy. Build. Compound. The HarborWind Review Perspectives on buying, building, and compounding industrial businesses Printed March 27, 2026 Private Investment Firm · Chicago | Boston harborwind.com/insights The Firm We acquire, transform, and hold founder-led businesses for the long term, preserving legacies while compounding value. What We Invest In We acquire founder-led businesses generating $2M–$8M EBITDA in the sectors we know. Specialty Chemicals Industrials and Industrial Services Essential B2B Services Offices Chicago 901 W. Jackson Blvd., Suite 306 (312) 449-4963 Boston 24 School St, Second Floor (617) 701-4963 Contact hello@harborwind.com harborwind.com/contact In This Printing | From The HarborWind Review # What Is an Earnout and Why It Might Work in Your Favor Learn how an earnout works in a manufacturing business sale, when it helps sellers, and how to negotiate terms. By Sean Mahoney  |  March 27, 2026  |  8 Minute Read Our Thesis We acquire the businesses that keep industry running. We give them the capital, capabilities, and time to become something greater. Read This Article Online Friday, March 27, 2026 [HarborWind Review](https://harborwind.com/insights) Ideas for enduring industrial businesses [Manufacturing Owners](https://harborwind.com/insights/manufacturing-owners) [Buy](https://harborwind.com/insights/editorials?section=manufacturing&chapter=Buy) # What Is an Earnout and Why It Might Work in Your Favor Learn how an earnout works in a manufacturing business sale, when it helps sellers, and how to negotiate terms. By [Sean Mahoney](https://harborwind.com/insights/author/sean-mahoney) · March 27, 2026 · 8 min read ![Exactly two runners moving right while both briefly hold the same relay baton before a finish line](https://harborwind.com/hs-fs/hubfs/blog-images/earnout-explained-manufacturing-featured-20260802T143158Z-human_action-e7bfa2ed57d7.webp?width=1200&height=630&name=earnout-explained-manufacturing-featured-20260802T143158Z-human_action-e7bfa2ed57d7.webp) Exactly two runners moving right while both briefly hold the same relay baton before a finish line Table of Contents [← Back to all insights](https://harborwind.com/insights) Contents Share Copy Link [Email](mailto:?subject=%3Cspan+id%3D%22hs_cos_wrapper_name%22+class%3D%22hs_cos_wrapper+hs_cos_wrapper_meta_field+hs_cos_wrapper_type_text%22+style%3D%22%22+data-hs-cos-general-type%3D%22meta_field%22+data-hs-cos-type%3D%22text%22+%3EWhat+Is+an+Earnout+and+Why+It+Might+Work+in+Your+Favor%3C%2Fspan%3E&body=Thought%20you%20might%20find%20this%20interesting:%20https%3A%2F%2Fharborwind.com%2Finsights%2Fearnout-explained-manufacturing) 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](https://harborwind.com/insights/founders-guide-selling-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](https://www.srsacquiom.com/our-insights/deal-terms-study-2024/) says one-third of private-target M&A deals now carry an earnout provision. [RSM US](https://rsmus.com/insights/industries/technology-companies/earnouts-gain-traction-in-tech-deals-bridging-valuation-gaps.html), 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](https://harborwind.com/investment-criteria), 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. ## What is an earnout in an M&A transaction? 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](https://harborwind.com/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](https://rsmus.com/insights/industries/technology-companies/earnouts-gain-traction-in-tech-deals-bridging-valuation-gaps.html) 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](https://corpgov.law.harvard.edu/2025/07/11/the-art-and-science-of-earn-outs-in-ma/) 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. ## When does an earnout work in a seller's favor? 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](https://www.srsacquiom.com/our-insights/ma-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](https://corpgov.law.harvard.edu/2025/07/11/the-art-and-science-of-earn-outs-in-ma/) 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. ## How do you negotiate earnout terms that actually pay out? 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](https://corpgov.law.harvard.edu/2023/11/29/earnouts-update-2023/) 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](https://corpgov.law.harvard.edu/2023/11/29/earnouts-update-2023/) notes that, absent explicit language, buyers generally have no implied duty to take steps to maximize an earnout. [The 2025 analysis](https://corpgov.law.harvard.edu/2025/07/11/the-art-and-science-of-earn-outs-in-ma/) 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. --- ## How HarborWind thinks about earnouts 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](https://harborwind.com/specialty-chemicals), [niche manufacturing](https://harborwind.com/niche-manufacturing), and [industrial B2B services](https://harborwind.com/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](https://harborwind.com/insights/why-we-buy-founder-led-industrial-businesses). --- ## Sources - [SRS Acquiom 2024 M&A Deal Terms Study](https://www.srsacquiom.com/our-insights/deal-terms-study-2024/) - [Managing M&A Earnouts: Everything You Need to Know, SRS Acquiom](https://www.srsacquiom.com/our-insights/ma-earnouts-overview/) - [Earnouts Gain Traction in Tech Deals Bridging Valuation Gaps, RSM US](https://rsmus.com/insights/industries/technology-companies/earnouts-gain-traction-in-tech-deals-bridging-valuation-gaps.html) - [The Art and Science of Earn-Outs in M&A, Harvard Law School Forum on Corporate Governance](https://corpgov.law.harvard.edu/2025/07/11/the-art-and-science-of-earn-outs-in-ma/) - [Earnouts Update 2023, Harvard Law School Forum on Corporate Governance](https://corpgov.law.harvard.edu/2023/11/29/earnouts-update-2023/) --- *Buy. Build. Compound.* ## Frequently Asked Questions ### What is an earnout in an M&A transaction? An earnout is a deal structure where part of the purchase price is paid after closing if the business hits agreed performance targets. It lets buyer and seller split the difference between what can be proven at signing and what the seller believes the business will deliver after the deal closes. Roughly one-third of private-target deals now include one. ### When does an earnout actually 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. SRS Acquiom data shows earnouts achieve about 21 cents on the dollar across all deals and pay at all only 59 percent of the time. Vague earnouts are expensive. Precise ones, with a short duration and real covenants, give sellers a fair chance to earn the money. ### Why are most earnouts written around revenue rather than EBITDA? RSM US reports that 64 percent of private-company earnouts in 2023 used revenue as the metric and 23 percent used EBITDA. Revenue sits higher on the income statement and is less exposed to a buyer's post-close decisions about overhead, hiring, systems costs, or integration charges. Sellers generally prefer revenue targets because they are harder to distort after closing. ### How does a founder negotiate earnout terms that actually pay? Three things. Define the metric like someone will argue about it, because they might. Avoid all-or-nothing cliffs by using tiered payouts, floors, and accelerators. And get specific about how the buyer can run the business, since Delaware courts enforce the contract as written and only 25 percent of deals include strong post-closing operating covenants. For Manufacturing Owners ## A long-term home for the company you built. HarborWind Partners acquires and holds founder-led manufacturers. Learn how we approach ownership, operating improvement, and the years after a transaction. [How We Partner With Owners →](https://harborwind.com/for-business-owners) The HarborWind Review ## Keep reading with us. Occasional editorials for owners, operators, and advisors building enduring industrial businesses. Leave this field blank Receive the Review HarborWind editorials only. 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