Founder exit guide
Founder exit guide
Overview
An earn out defers part of the price and makes it conditional on performance after completion. It bridges a valuation gap, and it is where founders most often lose money they thought they had agreed.
In a UK software sale, an earn out usually appears when the buyer and the founder disagree about the future. The founder believes the pipeline will convert and next year's ARR will be higher. The buyer is not sure. Rather than argue, the buyer pays part of the price now and the rest later, if the number the founder promised actually arrives.
That is reasonable in principle. In practice, the founder is being asked to deliver a result inside a business they no longer have as much control over, measured on terms the buyer drafted, over a period in which the buyer may change the pricing, the sales team, the product and the accounting policies. Whether the earn out pays depends on the detail, and the detail is negotiable.
This guide explains the common structures, the metrics used, the protections worth asking for and the situations where the right answer is to take a lower certain price instead.
How earn outs work
Each of these is a negotiation in its own right. The headline percentage is the least important of them.
A deferred, conditional payment on top of the price paid at completion. Commonly ten to thirty percent of the total consideration, over one to three years, tied to revenue, ARR, gross profit or EBITDA (earnings before interest, tax, depreciation and amortisation). Legally it is a contractual right, not equity, so it ranks as a debt the buyer owes you if the conditions are met.
A single target with an all or nothing payment, a sliding scale that pays a percentage of the earn out for a percentage of the target, or a stepped structure with thresholds. Sliding scales are fairer to the founder. Cliff edge targets concentrate all the risk at one number on one date, and buyers know it.
Revenue and ARR are hardest for a buyer to manipulate and easiest for a founder to influence. EBITDA is the opposite: the buyer controls costs, allocations and accounting policies after completion. If the earn out must be on profit, the definition of profit, the allocation of group costs and the treatment of integration spend all need to be written down.
Covenants that the buyer will run the business in the ordinary course, keep the product sold under its own name, fund the sales team and not change the accounting basis. A right to information during the period. An acceleration clause that pays the earn out in full if the buyer sells the business, restructures it or removes you without cause.
Earn outs are usually taxed as part of the sale proceeds, but the treatment depends on structure, on whether you remain employed and on how the payment is calculated. Payments that look like a reward for staying on can be taxed as income. Take advice before the heads of terms are signed, not after.
Where the buyer is a trade acquirer who intends to fold your product into theirs, the metric can become hard to measure, so ask for one that survives integration or for a smaller deferred share. Where the earn out would exceed around a third of the price, you are carrying a large part of the buyer's risk, and a lower certain price may be worth more. And where you do not intend to stay, be realistic about how much influence you will have over the outcome.
Situations
An earn out asks you to deliver a result in a business you no longer fully control, so the terms matter as much as the number.Why the drafting matters more than the percentage.
FAQ
Common enough that most founders should expect one to be proposed, particularly where growth is the basis of the valuation or the buyer is a smaller trade acquirer. Private equity buyers also use them, often alongside rollover equity, to keep the founder invested in the plan.
Commonly between ten and thirty percent of total consideration. Above a third, the balance of risk has moved too far towards the founder and it is worth asking whether a lower price paid in full would be better.
Revenue or ARR, wherever the founder can get it. Those are the numbers the founder influences most and the buyer manipulates least. Profit based earn outs need detailed definitions of what counts as cost and how group overheads are allocated, and even then they are harder to protect.
Only what the sale agreement says. Without an acceleration clause, the earn out can be left behind, unmeasurable, with a new owner who had no part in agreeing it. The standard protection is a clause that pays the earn out in full, or at a defined level, on a change of control, insolvency or a material change to the business.
Not necessarily, but the two are often linked, and where the payment is conditional on your employment it may be taxed as income rather than as sale proceeds. Separate the two in the drafting where you can: a sale price that pays whatever happens to your role, and a role you can leave on agreed terms.
Corinium Advisory helps founders read and compare offers, including the structure and protections of any earn out, and works alongside the lawyers and the corporate finance adviser who negotiate the terms. It is independent and paid by the founder. See the founder exit page for how the work runs.
Read next
The main guide: thinking, preparing and executing a sale, partial liquidity, growth equity or succession, with independent, founder paid help at each stage.
Selling a software businessExit readiness means having the evidence a buyer will ask for before they ask for it. This checklist covers the six areas every buyer of a UK software business tests, and what good looks like in each.
SaaS Exit Readiness Checklist for UK FoundersThe two kinds of buyer pay for different things, structure the deal differently and want different things from you afterwards. Knowing which you are talking to changes how you prepare and what you should ask for.
Selling a Software Business to Private Equity vs TradeContact