Earn-outs in UK startup acquisitions: how they work and why they matter for founders

An earn-out is a mechanism for paying part of an acquisition price upfront and holding back the rest until the acquired business hits agreed performance targets over a set period afterwards, usually one to three years. It exists because buyers and sellers frequently disagree about what a startup is actually worth: the buyer wants to pay for performance it can already see, while the founder believes future growth justifies a higher price. Splitting the consideration this way lets a deal complete without either side having to fully accept the other’s valuation, but it also means a meaningful part of what a founder actually receives depends on decisions made after they have sold control of the business.

What is an earn-out, in practice?

An earn-out is a deferred and conditional portion of the sale price, set out in a dedicated schedule within the sale and purchase agreement (SPA), that only becomes payable if the business meets specific, pre-agreed performance conditions during a defined period after completion. The upfront payment is usually the larger share and is not contingent on anything; the earn-out payment sits on top and can be paid as a single lump sum at the end of the period or in stages tied to each year’s results. Because the earn-out is contractual rather than automatic, exactly how the target is measured, who controls the business during the earn-out period, and what happens if there is a dispute all have to be spelled out in detail in the SPA rather than left to goodwill.

Why do buyers and sellers use earn-outs at all?

Earn-outs exist to bridge a valuation gap: they let a buyer pay only for performance that actually materialises, while giving a seller the chance to capture a higher total price if the business performs as they expect. For an early-stage or fast-growing startup where next year’s numbers are genuinely uncertain, a fixed all-cash price forces one side to accept the other’s forecast on trust; an earn-out instead lets the price adjust to what actually happens. This is particularly common in UK technology acquisitions where the target’s value depends heavily on retaining founders, key staff or customer relationships that only the existing team can realistically deliver in the short term, so the earn-out period also functions as a retention and integration mechanism, not just a pricing tool.

What metrics are earn-outs usually based on?

Earn-outs are typically anchored to one of three broad types of metric, each with different trade-offs for a founder negotiating the deal.

Metric type	How it works	Best suited to
EBITDA or operating profit	Target tied to normalised profit, usually under UK-adopted accounting standards such as FRS 102	More established businesses with stable, predictable costs
Revenue or gross profit	Target tied to top-line sales, sometimes with margin floors or churn caps to stop unprofitable growth	Earlier-stage or fast-growing companies without settled profit margins
Operational or usage metrics (e.g. ARR, active customer numbers)	Target tied to a specific, tightly defined business metric rather than a financial statement figure	SaaS and subscription businesses where recurring revenue is the clearest signal of health

Whichever metric is chosen, the single biggest driver of post-deal disputes is a vaguely defined or easily adjustable metric, according to legal guidance from Harper James on structuring UK earn-outs, which is why precise, worked-example definitions tied to a named accounting framework matter more in practice than which broad category of metric is picked.

What can go wrong for founders during the earn-out period?

The core risk for a founder is losing operational control of the business while their own payout still depends on its performance, so a buyer’s decisions on integration, staffing, pricing or budget allocation during the earn-out period can directly suppress the very numbers the founder needs to hit. A change of ownership or further restructuring of the business partway through the earn-out period is a related risk, since it can materially change who is actually making the decisions that determine whether the target is met. Founders negotiating an earn-out should generally push for the earn-out to be tied only to metrics they retain meaningful control over, for the SPA to include guardrails preventing the buyer from taking actions primarily intended to depress the metric, and for a clear, independent process for resolving disagreements about whether a target has actually been met.

What can go wrong for buyers?

From the buyer’s side, the main risk is the opposite problem: being contractually restricted from integrating or restructuring the acquired business in the way it needs to, because doing so might be seen as undermining the seller’s earn-out. Buyers typically want the SPA to preserve as much freedom as possible to run the combined business as they see fit, while accepting narrower, specific guardrails rather than a broad obligation to “maximise the earn-out” for the seller, since an open-ended obligation of that kind is difficult to comply with and easy to dispute later. Getting this balance right, enough protection for the seller to trust the process, enough freedom for the buyer to actually run the business, is usually the hardest part of negotiating the earn-out schedule.

How is the earn-out actually paid, and what protects a founder if it isn’t?

Earn-out payments can be made in cash, in the buyer’s shares, or a mix of both, and the SPA should set out exactly when payment is due after each measurement period along with a defined process and timeline for the seller to review and, if necessary, formally object to the buyer’s calculation of the metric. Because the earn-out is only a contractual promise rather than money already held, sellers sometimes negotiate additional security, such as an escrow or retention arrangement, particularly where there is doubt about the buyer’s ongoing financial strength or a history of disputes in previous deals. Any dispute resolution mechanism, typically referral to an independent accountant, should also be agreed upfront in the SPA rather than negotiated after a disagreement has already arisen, since agreeing a process while both sides are still cooperating is far easier than agreeing one once a dispute is live.

Does an earn-out affect anything a company has to file or report?

Completion of an acquisition, whether structured with an earn-out or not, still triggers the usual Companies House filing obligations on a change of ownership, generally reflected in the company’s next confirmation statement or, where new shares are issued, a return of allotment on form SH01 within one month, according to GOV.UK’s guidance on event-driven company filings. The earn-out schedule itself sits within the SPA as a private contractual arrangement between buyer and seller and does not need to be filed publicly, though any shares issued as consideration, including deferred consideration shares tied to an earn-out, do need to be reflected correctly in the company’s statutory records once they are actually allotted.

The practical takeaway

An earn-out can genuinely benefit a founder who believes in the business’s near-term growth, but it converts part of the sale price from a certainty into a bet on decisions that, once the deal completes, are no longer entirely theirs to make. The value of an earn-out clause in practice comes down almost entirely to its drafting: how precisely the metric is defined, how much operational control the founder retains, and how disputes get resolved. Any founder facing an earn-out offer should get it reviewed by a lawyer experienced in UK M&A before signing, since the difference between a well-drafted earn-out and a poorly drafted one is often the difference between actually being paid and spending the following two years in a dispute.