Earnout

An earnout is a deal structure used in agency acquisitions where part of the purchase price isn't paid upfront — it's paid over 1-3 years based on whether the agency meets certain performance milestones after the deal closes. It's how buyers and sellers bridge the gap when they disagree about what the agency is worth.

Here's a typical scenario: a buyer offers $4 million for your agency. You think it's worth $5.5 million. To bridge the $1.5 million gap, you agree to an earnout: $4 million at close plus up to $1.5 million paid over 2 years if the agency maintains 90% client retention and hits $3 million in annual AGI. If you hit the targets, you get your $5.5 million. If the agency underperforms post-acquisition, the buyer pays less.

Earnout targets are usually based on revenue, AGI, EBITDA, client retention, or a combination. The earn period typically runs 1-3 years. During this period, the founding team usually stays on to run the agency — which creates a unique dynamic where you're now an employee of the acquiring company but your compensation depends on running the agency as if you still own it.

If you're planning to sell your agency someday, understanding earnouts is essential because they'll almost certainly be part of the deal. Buyers love earnouts because they reduce risk — they're not paying full price for projected future performance. Sellers should be cautious because earnouts shift risk from the buyer to the seller: you've given up ownership but your payout depends on post-acquisition performance, which you may have less control over.

The key is negotiating earnout terms that are within your control. Revenue-based targets are generally better than EBITDA targets because the acquirer controls overhead and cost allocation (and can manipulate EBITDA). Clear, objective metrics with independent verification protect both sides.