Your earnout is worth 20 cents on the dollar.

What is an earnout actually worth?

Roughly a fifth of face. Across private-target deals that carry an earnout, closer to one in five earnout dollars is actually paid (SRS Acquiom, M&A Earnout and Milestone Trends, published 7 July 2026, on a full-year 2025 deal population). The headline number and the expected number are different numbers, and only one of them belongs in a comparison of offers.

Work the arithmetic on a headline of 100, of which 20 sits in an earnout. Priced at the published payout rate, the offer is worth about 84. A competing all-cash bid of 88 is the higher offer, not the lower one, and a seller who compares 100 against 88 has already lost four points before negotiating anything.

None of that makes an earnout a bad instrument. It makes it a priced instrument. The error is treating contingent consideration as deferred certain consideration, which is what a headline purchase price invites everybody to do.

Who ends up with one?

Smaller sellers, disproportionately. Some 24% of private-target deals outside life sciences now carry an earnout, up from 19% in 2014 (SRS Acquiom, 7 July 2026). At the bottom of the market the share is higher: 29% across lower-middle-market deals with closing payments of $50m or less, and 35% where the closing payment is $25m or less (SRS Acquiom, 2026 M&A Deal Terms Special Report: Lower Middle-Market Deals, 5 June 2026, drawn from more than 4,400 private-target transactions closed through 2025).

The buyer mix explains part of it. Private equity buyers were involved in only 11% of that lower-middle-market population, and lower-middle-market deals are more than 40% of all M&A transactions (SRS Acquiom, 5 June 2026). Corporate and individual buyers price uncertainty with structure more often than a fund does, because they are underwriting with their own balance sheet rather than a committed pool.

The direction of travel in 2026 is toward more of it, not less. With sponsor-to-sponsor processes stuck on valuation, practitioners report a decent amount of deferred purchase price mechanisms hedging seller performance against underwritten value, through earnouts, seller notes and other structures (Andrew Silver, Much Shelist, quoted by PitchBook News, 6 July 2026). Expect the contingent share of a headline number to rise through 2027, not fall.

How do you price the gap?

Discount the contingent portion, then compare. That is the whole method, and it takes one line of arithmetic that almost no seller performs before signing a letter of intent.

Two adjustments make the estimate better. First, size: a typical earnout runs around 31% of the closing payment over a median measurement period of about 24 months, most often on an EBITDA measure (SRS Acquiom data as summarized by the Harvard Law School Forum on Corporate Governance, July 2025). The larger the contingent share and the longer the period, the more of the price sits outside the seller's control. Second, the metric: an earnout measured on revenue or gross profit is closer to a certain payment than one measured on EBITDA or net income, because fewer of the buyer's post-closing decisions touch it.

It is also worth remembering that the certain portion is not entirely certain either. Some 93% of deals carry a purchase price adjustment mechanism, and 89% of those with one recorded an actual adjustment (SRS Acquiom, 19 May 2026, on a pooled 2020 to 2025 transaction population). The signed number is rarely the wired number, before the earnout is even reached.

What makes an earnout payable?

Position in the income statement, above everything else. The higher the metric sits in the hierarchy of the income statement, the better the measure for the seller: revenue and gross profit beat net income and EBITDA, because the buyer controls far fewer of the lines between the top of the statement and the measurement point (Marks, Middle Market M&A).

The rest of the design work is a short list, and it belongs in the letter of intent rather than in the definitive agreement. Whose performance is being measured, the old business, the new one, or the combined entity. Which financial measure. Over what duration. On what accounting basis, and whether that basis is frozen at closing or moves with the buyer's policies. What the seller's monitoring and information rights are. What happens if the buyer reorganizes, reallocates costs, or acquires something else into the same reporting unit. And how a dispute gets resolved (Marks, Middle Market M&A; Hunt, Structuring Mergers, Acquisitions and Other Business Combinations).

Leverage on all of it peaks at the letter of intent and falls from there. Once exclusivity is granted, an earnout term left open is an invitation to negotiate it in the buyer's favour with no alternative in the room.

Our working standard for a disciplined earnout is a contingent share at or below roughly a quarter of value, on a measure the seller can still influence, over a period at or below 24 months, with defined accounting and monitoring rights. Beyond those bounds, the instrument is transferring more risk than the price gap it was meant to bridge.

What else bridges the gap?

Rollover equity, a seller note, and a holdback do similar work with different risk. Rollover keeps the seller invested in the same enterprise, which aligns the parties rather than setting them against each other over a definition. A seller note is a credit exposure to the buyer instead of a performance exposure to the business, which is a question a seller can actually diligence. A holdback against a specific, identified risk is narrower than an earnout and expires (Marks, Middle Market M&A, on the forms of consideration).

Escrow norms have moved in the seller's favour where representation and warranty insurance is used, from 18 to 24 months at around 10% of value to often 12 months at a low single-digit percentage. That matters, because a seller comparing two offers should be adding up every deferred component, not just the one labelled earnout.

The case for structuring rather than arguing is straightforward. A price gap that cannot be closed with evidence is usually closed with structure or not at all. The case for pricing it is equally straightforward: a contingent dollar is worth about twenty cents, so a deal that bridges a gap with contingency has not closed the gap. It has renamed it.