When you receive an offer to sell your SaaS company, the headline price may not tell you how much you will receive at closing.
Part of the purchase price may be structured as an earn-out, which is a future payment that will depend on the company reaching agreed performance targets after the acquisition takes place.
For example, a buyer might offer $8 million at closing and up to another $2 million should the company reach specific revenue goals during the following two years. The potential transaction value is $10 million, but only $8 million is guaranteed at closing.
An earn-out can help a buyer and seller move forward when they see the company’s future value differently. But it also means the seller continues to carry out some of the business risk after ownership has changed.
Why Buyers Use Earn-Outs
Earn-outs are often used when both sides agree that the company has meaningful growth potential but disagree about how much of that potential should be reflected in today’s valuation.
A founder may see a strong pipeline, a new product, or an expansion opportunity as evidence that the business is about to grow. A buyer may consider these anticipated earnings credible but will still price the deal on what’s been proven, not projected. An earn-out can bridge that gap. It may also appear when retention, customer concentration, founder involvement, or another part of the forecast creates uncertainty.
The structure does not remove the uncertainty; it just balances who carries it after the transaction closes.
How Can Earn-Out Affect the Seller
The most immediate effect is that part of the purchase price remains conditional.
That does not mean the earn-out is meaningless or unlikely to be paid. It means the seller should understand what cash will be paid at closing, what will be guaranteed for deferred payments, and what payments they still need to earn. These arrangements can keep the founder financially connected to the company after the sale. When the founder remains in an operating role, their responsibilities may be tied directly or indirectly to the earning-out target. Although this can create alignment when the founder and buyer share the same operating plan, it may also create tension if they disagree about hiring, pricing, product investment, or the pace of growth.
Founders should ask themselves if they would still consider the guaranteed portion of the transaction a fair outcome if the earn-out were never paid.
The Metric Matters
Earn-outs can be based on revenue, recurring revenue, EBITDA, customer retention, product milestones, or a combination of measures. Each creates different incentives and risks.
Revenue may appear straightforward, but the agreement should define what counts, when it is recognized, and how discounts, refunds, and renewals will be treated.
Although EBITDA connects payment to profitable growth, it is affected by spending decisions. New hires, shared costs, and product or marketing investments may reduce reported earnings, even when those decisions support the company’s long-term future.
Operational milestones can work when value depends on a specific launch, integration, or customer outcome. However, the milestone must be objective enough for both sides to determine whether it was achieved.
The best metric is not necessarily the one that produces the largest potential payment. It is one both sides can define and measure clearly.
The Central Risk: Performance Without Control
Before the sale, the founder usually has the final word on the decisions that shape performance. After closing, that authority may change.
The founder may continue leading daily operations while the new owner controls the budget, approves senior hires, establishes broader priorities, or decides how costs are allocated. The buyer may also change pricing, redirect sales resources, or pursue investments that affect short-term results.
Those decisions may be reasonable for the business and at the same time make an earn-out target harder to reach.
A forecast that was realistic under the founder’s plan may produce a different result under a new operating structure, so it’s important to understand who controls the decisions that can determine what’s achieved.
What Should Be Clear Before You Agree
Earn-out language should be reviewed carefully with experienced M&A legal and tax advisors.
At a practical level, the seller should understand:
- The exact metric and calculation method
- The measurement period and payment timing
- The accounting policies that will apply
- What reporting and information the seller will receive
- Which decisions remain under the founder’s authority
- How new costs or organizational changes will be treated
- What happens if the founder’s role changes or employment ends
- How calculation disputes will be resolved
- What happens if the buyer sells or integrates the company
The objective is not to anticipate every possible event but to remove ambiguity from the issues most likely to affect payment.
Look Beyond the Headline Number
Acquisition offers can show the same total value and still provide very different outcomes.
One may pay most of the consideration at closing. Another may depend heavily on future performance. A third may combine upfront cash with seller financing, rollover equity, or compensation for a continuing role.
These components are not interchangeable. Employment compensation pays for future work. Rollover equity represents continued ownership exposure. An earn-out is a portion of the purchase price that’s paid later, contingent on the business hitting defined results.
Founders should compare not only the maximum value of each offer but also its likelihood, timing, obligations, and dependence on factors outside their control.
The Bottom Line
An earn-out can be a practical way to bridge a genuine valuation gap. It can allow a seller to participate in growth that has not yet been proven while giving the buyer confidence that additional value will be paid for actual performance.
At Continuum, we believe fair and simple terms create a stronger foundation for an acquisition. Founders should understand exactly what is guaranteed, what remains conditional, and what will be expected of them after closing.
The headline price may begin the conversation, but it’s the structure that determines what the transaction will actually mean.
Frequently Asked Questions
What is an earn-out in a SaaS acquisition?
An earn-out is a conditional payment made to the seller after an acquisition closes. The amount depends on whether the company achieves agreed targets, such as revenue, EBITDA, customer retention, or product milestones, during a defined period.
Why do buyers include earn-outs in acquisition offers?
Buyers often use earn-outs to bridge a valuation gap. A seller may expect future growth to increase the company’s value, while the buyer may want evidence of that performance before paying for it. The earn-out makes part of the purchase price dependent on future results.
Are SaaS earn-outs based on revenue or EBITDA?
They can be based on either. Revenue may be simpler to measure but still requires clear definitions. EBITDA reflects profitability but can be affected by spending and cost-allocation decisions after closing. Some earn outs use recurring revenue, retention, customer, or product milestones instead.
What are the main earn-out risks for sellers?
The primary risk is that payment depends on performance after the seller no longer has full control of the company. Changes to budgets, hiring, pricing, product investment, sales strategy, or cost allocation may affect whether the target is achieved.
What happens if the buyer changes how the company operates?
That depends on the acquisition agreement. Sellers should clarify which operating decisions the buyer may make, how those decisions will affect the earn-out calculation, and whether the agreement provides protections, reporting rights, or a process for resolving disagreements.
Is an earn-out part of the purchase price?
An earn-out is generally presented as contingent purchase consideration, but it is not guaranteed cash at closing. Sellers should distinguish between the upfront payment, guaranteed deferred consideration, conditional earn-out payments, rollover equity, and compensation for post-close employment or consulting work.