How to structure earn-out deals?

February 24, 2026

by a searcher from The University of Chicago - Booth School of Business in Boston, MA, USA

Hi all, my partner and I are growing our IT Services through M&A, and we need to learn fast on how to effectively structure earn-out deals (where a large part of the purchase price is paid later, based on the future performance of the business). We already have potential targets that are amenable to this structure, but we need to learn fast how do structure them properly. Can anyone advise do/don't or point us to lawyers with experience with this? Thanks.

Reply by a searcher
from Florida Atlantic University in Boca Raton, FL, USA

Some IT earn-outs fail because they’re tied to EBITDA, which is too easy for a seller to manipulate post-close through creative accounting or aggressive opex. If you're structuring this, you need to anchor the earn-out on Gross Profit or Specific High-Margin Contract Retention to protect your downside. You also need a 'Catch-Up' provision so you don't overpay for a lucky year one that doesn't sustain. I’ve built a specific Earn-Out Sensitivity Model that stress-tests these scenarios against your debt covenants to make sure you don't accidentally trigger a technical default if the earn-out hits but cash flow lags. Happy to show you the logic I use to bake these into the LBO model so your LOI is actually defensible

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