Earnouts in M&A: How Privat... | Lippes Mathias LLP

Earnouts in M&A: How Private Equity and Independent Sponsors Are Using Them to Close Deals

November 16, 2025 | Corporate Blog

Trends/tips for earnout use in private equity and independent sponsor deals:

Used in about 1 of 3 deals (of those, only 22% using EBITDA milestone, with 62% using revenue + balance gross margin dollars)
With earnouts, sellers are trying to capture full value, and buyers are trying to de-risk overpaying
Often seen in deals with volatility in recent numbers (spikes, uncertainties around sustained revenue/profit levels, regulatory / tariff concerns, etc.)
1 to 2 years post-close period is typical (only 15% of earnouts go out further)
Sellers negotiate for post-close covenants to prevent buyers from “gaming” the system, while buyers are hesitant to limit their ability to run the business
Dispute resolution mechanisms in a purchase agreement are common
If further growth is tied to, say, a specific customer or new product (from the seller’s pre-close efforts), a royalty on just that revenue (with assumptions) may be a better alternative
Best practice is for parties to share the model and agree on example scenarios, and confirm the purchase agreement language with accountants
If roll-over equity is part of a deal, sometimes earnouts are avoided (buyer will argue seller is already getting the benefit of future upside).

John Koeppel's commentary on "Paying for Performance: earn-outs in M&A," Financier Worldwide Magazine, November 2025

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Related Team

John J. Koeppel
Partner | Executive Committee | Team Leader - Private Equity | Team Leader - Independent Sponsor