Example: $4M headline with a $1M earn-out (fictional)
| Year-1 EBITDA result | Earn-out paid | Total received |
|---|---|---|
| $900,000 (target $900K, full payout) | $1,000,000 | $4,000,000 |
| $810,000 (90% of target, pro-rata from 80%) | $500,000 | $3,500,000 |
| $700,000 (below 80% floor) | $0 | $3,000,000 |
Terms that decide whether you get paid
- Metric: revenue is easier to verify than EBITDA; EBITDA can be reduced by the buyer’s overhead allocations.
- Accounting definitions: lock the accounting policies and exclude integration costs and corporate charges.
- Operating covenants: require the buyer to run the business consistently with past practice, and keep your key staff and pricing authority.
- Acceleration: full payout if the buyer sells the business, merges your brand away or fires you without cause.
- Information rights and disputes: monthly reporting and an independent accountant to resolve disagreements.
- Catch-up: missed year-1 dollars recoverable if year 2 over-delivers.
SBA deals cannot use earn-outs
If your buyer is using an SBA 7(a) loan, the purchase price must be fixed at closing; seller earn-outs are prohibited under SOP 50 10 8 and remain so in SOP 50 10 8.1, effective October 1, 2026 (per lender-consultant summaries of the SOP). A standby seller note is the usual substitute. See SBA loans and your sale.
Tax
Earn-out payments are generally part of the sale price and may qualify for installment-method reporting, which spreads gain over the years you are paid; depreciation recapture is still taxed in the year of sale (IRS Publication 537). Payments disguised as compensation for your continued work can be taxed as ordinary income - keep them separate from your employment pay. Confirm with a CPA.
Know your number first
Sourced range for your trade in 60 seconds, no email needed.
Frequently asked questions
What is an earn-out in selling a business?
A contingent part of the price paid after closing if the business meets agreed targets, usually revenue or EBITDA over one to three years.
Are earn-outs a good idea for sellers?
Only as a bridge for a real price disagreement, with tight definitions and acceleration clauses. Value guaranteed cash more than earn-out dollars.
Can an SBA-financed buyer offer an earn-out?
No. SBA 7(a) change-of-ownership deals require a fixed price at closing; earn-outs are prohibited.
Sources
- IRS Publication 537 - Installment sales (accessed 2026-09-23)
- Whiteford - SBA SOP 50 10 8: key changes (seller notes, equity injection, partial changes of ownership) (accessed 2026-09-23)
- LRM Lender Consultants - Change of ownership under SOP 50 10 8.1 (accessed 2026-09-23)
- SBA SOP 50 10 (lender and development company loan programs) (accessed 2026-09-23)