The FNDRS Playbook · PB18 · Structure
The earn-out design grid
An earn-out you cannot control is a price cut with extra steps.
The idea
An earn-out you cannot control is a price cut with extra steps.
Earn-outs bridge a valuation gap. They are reasonable when the founder stays in a role that influences the result and when the metric is one the buyer cannot easily manipulate.
They are dangerous when the founder leaves at close and the metric is EBITDA under the buyer’s accounting.
You sell once. They buy for a living.
Every sale of a founder-led business is a negotiation between a first-timer and a professional. Each chapter of the playbook closes part of that gap.
Read the asymmetryThe figure
Influence against the metric
Acceptable with protections
You can steer, but the metric can be gamed.
What to do Define the accounting rules in the agreement; cap integration charges.
A fair earn-out
TargetA revenue- or unit-based metric, and you stay to deliver it.
What to do Accept, with a clear formula and a short horizon.
Do not accept
No control and a metric that can be gamed.
What to do Convert it to price, a seller note, or escrow.
Acceptable if small
An objective metric, but no influence.
What to do Keep it a minor part of the stack; get acceleration on a change of control.
- How easily the buyer can influence the metric
- EBITDA after integration costs is easy to influence; gross revenue from existing customers is hard.
How to read it
Earn-outs are sorted by whether the founder stays in a position to influence the result (vertical) and whether the buyer can easily influence the metric (horizontal). The only clearly fair earn-out is one the founder can deliver on a metric the buyer cannot game.
The three P’s
Where this chapter sits
This chapter supports the three levers rather than pulling one of them.
Positioning
Which category. Where in the range.
Pre-emption
Find it first. Frame it first.
Process
Competition. Timing. Leverage.
What you keep.
More in Structure
See where your business sits
The Go-To-Market Analysis (GTMA) places your business on these frameworks with your own numbers, before a buyer does.