Founder PlaybookBusiness Services
Earn-outs are back, and they are longer than founders expect
Contingent consideration reappeared across the lower middle market this year. The structures are wider, the measurement periods longer, and the disputes predictable.
Sample editorial content. Companies and figures are illustrative placeholders.
In summary
- Earn-outs appeared in a majority of reviewed service transactions.
- Measurement periods stretched from twelve to twenty four months.
- Gross margin targets are replacing revenue targets.
Contingent consideration is a way to disagree about the future without ending the negotiation. It is also the most reliable source of post-closing conflict in the lower middle market.
The shift to margin targets
Revenue targets are simple to verify and hard to manipulate. Margin targets, increasingly the norm, depend on cost allocations the buyer controls once the founder no longer does.
- Corporate overhead allocated to the acquired entity after close.
- Shared services charged at rates set by the buyer.
- Discretionary investment that depresses margin during the measurement window.
Sellers who accepted margin targets without constraining these mechanics generally collected a fraction of the contingent consideration they modeled.