If someone handed you a signed deal worth $10 million, six million wired at close and four million contingent on the next three years, how much of that ten would you spend against today?
That is the practical question behind a note I got from a listener who is selling his business on exactly those terms. The earnout is tied to revenue targets over three years. He wants to know whether to treat it as real money or as a lottery ticket he ignores until it lands, and he is right that the answer changes everything downstream: the house they are looking at, when his wife retires, how aggressively they save between now and then.
Almost Nobody Gets Paid All Cash
For anyone who has not been through a sale, the first thing to understand is that businesses rarely change hands for a single wire. Earnouts are extremely common, and they exist for a specific reason: they move risk off the buyer and onto you. The buyer is happy to pay enough at close to get the deal done. Beyond that, they would rather say, hit the numbers you told me you would hit, and then I will pay the rest. That is not a hostile move. It is standard structure. But it means the last forty percent of your headline price is a performance bet, not a payment.
You Sold the Business, Which Means You Sold the Levers
Here is where earnouts get ugly, and they can get ugly fast. The moment the deal closes, you no longer control the thing your payout depends on. You may have influence. You almost certainly do not have authority.
I have watched a company hit its year one revenue target, and then watched the acquirer pull cash out of that same business, leaving it under resourced heading into year two. I have watched new management arrive halfway through year two with a fresh strategy, different products, different margins, different sales motion. Customers churn, revenue lands short, and the earnout that looked nearly certain in month twelve is suddenly gone. You are still on the hook for the target. You just no longer have the levers you would have pulled to hit it.
What Sellers Actually Collect
This is the part that tends to land hardest. When you look at the research on earnouts, sellers historically collect something on the order of twenty to twenty five cents on the dollar of the contingent amount. Not most of it. A quarter of it.
Applied to a $4 million earnout, that is roughly eight hundred thousand to a million dollars as a central expectation, not four million. After taxes, call it four to five hundred thousand.
Then Discount It Again for Time
That number gets smaller once you account for when it arrives. Money paid out across three years is not worth its face value today. Depending on your assumptions, you are knocking off something in the range of twenty to thirty percent to get to a present value.
So the honest planning number looks like six million dollars of real, current, spendable proceeds, plus something like two to three hundred thousand dollars of expected after tax value from the earnout in today’s terms. Build the plan on that. Focus the near term work where it actually matters: tax strategy on the six million, and getting that cash invested with a purpose rather than sitting while you wait to see what happens.
Year One Tells You Most of What You Need to Know
Revenue targets, as opposed to growth targets or a CAGR structure, tend to be additive across years. That matters, because it means a miss in year one is not an isolated event. If you fall short in the first year, the odds of catching up in years two and three drop sharply. It is a problem that compounds. Very few sellers miss year one and then make it all back later.
The flip side is that year one gives you real information. Give the structure twelve months, maybe twenty four, before you assign any credibility to the cash flows in the back years. That is not pessimism, it is sequencing. You are letting the deal show you what it is before you let it drive a mortgage payment or a retirement date.
Buy the House on the Six
None of this means you ignore the earnout. Model it, build contingencies around it, and know exactly what you would do differently if the full four million shows up. If it lands, that is a wonderful outcome. Pay the taxes, add a couple million to the plan, buy the house you actually wanted, and move your wife’s retirement date up.
But make every decision that has to be right on the six million you already have. That is the difference between a plan that survives a disappointing year two and one that quietly depends on a number you no longer control. If you are somewhere in this process now, run both versions with us, your advisors, before you commit to anything, so the earnout stays what it should be: icing, not the cake.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on planning around a business sale earnout, listen to the full podcast episode here.