Earn-Outs Don’t Fail Because of Structure — They Fail Because of Humans

By Lora Witt

Earn-outs are the Marmite of UK M&A. Advisers claim to understand them, buyers insist they are essential, and sellers nod along while privately assuming they will never see the money anyway. Almost everyone has a strong opinion, usually formed after one bad experience and reinforced by pub anecdotes involving phrases like “moving the goalposts” and “they stitched me up”.

Structurally, earn-outs are simple. Part of the price is paid later, contingent on performance. Psychologically, they are a minefield. And it is psychology, not drafting, that explains why so many of them go wrong.

The official narrative is that earn-outs exist to bridge valuation gaps. The seller wants more. The buyer wants certainty. The earn-out is the elegant compromise, allowing both sides to be right in theory and disappointed in practice. In reality, earn-outs exist because neither party fully trusts the other and both want to defer the argument.

Lawyers will tell you that earn-outs fail because they are poorly drafted. Accountants will blame unclear metrics. Buyers will say sellers lose interest. Sellers will say buyers sabotage results. All of these things happen. None of them are the root cause.

Earn-outs fail because they force humans into roles they are temperamentally unsuited to play.

At the heart of every earn-out is a contradiction. The seller has sold control but not responsibility. The buyer has bought responsibility but not full control. Both believe they are in charge. Both are wrong.

Founders entering an earn-out period often tell themselves a comforting story. They say they will “keep running the business as before”, just with a helpful new shareholder. They imagine autonomy, continuity and a polite buyer who will nod approvingly from a distance. This is fantasy.

Buyers, meanwhile, tell themselves an equally comforting story. They believe the seller will behave like a rational employee, motivated by incentives, aligned to targets and grateful for the opportunity. This is also fantasy.

What follows is not malice, but mutual incomprehension.

The founder still feels like the owner. After all, nothing material has changed day to day. The same staff ask the same questions. The same clients ring the same mobile number. The same problems land on the same desk. The fact that some shares have moved in Companies House does not register emotionally.

The buyer, however, has wired a large sum of money and now feels an overwhelming need to justify it. They see risk everywhere. They ask questions. They introduce reporting. They suggest “minor changes” that feel anything but minor to someone who built the business by instinct and improvisation.

This is where the tone shifts. Meetings become slightly tense. Emails get longer. The word “alignment” appears, which is rarely a good sign.

Earn-outs turn every decision into a potential argument about intent. Is the buyer investing for growth or suppressing profits? Is the seller genuinely trying to hit targets or quietly coasting now that some money is banked? Even when both parties act in good faith, suspicion creeps in. Humans are excellent at misreading motives, particularly when money is involved.

The UK context adds further complications. Many earn-outs are based on EBITDA, a number that looks objective until you ask how it is calculated. Accounting policies that were previously flexible suddenly matter. Costs that were once shrugged off as “one-offs” become points of contention. Investment decisions are reinterpreted as manipulation.

None of this is helped by the fact that founders are rarely natural earn-out performers. They did not build their businesses by hitting quarterly targets set by someone else. They built them by reacting, adapting and occasionally ignoring the numbers altogether. Asking them to suddenly optimise for a metric designed by a buyer is like asking a novelist to write to a word-count bonus scheme.

Buyers, too, struggle. They underestimate how much emotional labour an earn-out requires. They assume incentives will do the heavy lifting. They are often surprised to discover that resentment is not easily offset by spreadsheets.

One of the least discussed problems is identity. For many founders, the earn-out period is a slow erosion of self. They are no longer the boss, but they are not free either. They cannot fully move on, yet they cannot fully decide. Every disagreement feels personal. Every compromise feels like a loss.

This is why time is such a destructive force in earn-outs. The longer they run, the more opportunities there are for misunderstanding, fatigue and quiet disengagement. What begins as a reasonable commercial arrangement becomes an endurance test.

Ironically, the earn-outs that work best are often the least ambitious. They are shorter, simpler and based on things the seller can actually influence. Revenue-based earn-outs, while imperfect, often cause fewer arguments than profit-based ones. Fixed milestones tend to outperform rolling formulas. Clarity beats cleverness every time.

But even the best-designed earn-out cannot overcome a fundamental mismatch in expectations. If the buyer wants transformation and the seller wants stability, no amount of drafting will save it. If the seller wants autonomy and the buyer wants control, the earn-out will become a battleground.

This is why advisers who focus exclusively on structure miss the point. The question is not “how should the earn-out be drafted?”. The question is “should these two people be in business together at all, and if so, in what roles?”.

Some of the most successful transactions avoid earn-outs altogether by being more honest upfront. They price risk conservatively, pay less on day one, and compensate sellers through consulting arrangements, minority stakes or deferred consideration that is not performance-linked. These approaches are often dismissed as inelegant. They are, in fact, humane.

There is also a tendency to treat earn-outs as neutral tools, rather than as signals. The presence of an earn-out usually indicates uncertainty: about sustainability, about leadership, about growth. Acknowledging that uncertainty openly is far healthier than pretending it can be engineered away.

From the buyer’s perspective, earn-outs are often used as insurance policies. From the seller’s perspective, they feel like probation. Neither is a comfortable position from which to build trust.

When earn-outs do succeed, it is usually because the human factors were addressed first. Roles were clearly defined. Authority was genuinely delegated. Communication was frequent and candid. Expectations were reset early and often. And, crucially, both sides accepted that compromise was not a failure but a requirement.

The most telling sign of a doomed earn-out is not a flawed formula, but a sentence. When a seller says “I’ll just prove them wrong”, or a buyer says “they’ll soon realise”, the outcome is already drifting off course.

Earn-outs are not inherently bad. They are simply unforgiving of self-deception.

How Lexis Capital Group can assist

Lexis Capital Group approaches earn-outs as behavioural arrangements first and financial mechanisms second. We work with buyers and sellers to assess whether an earn-out is genuinely appropriate, or whether it is being used to postpone an unresolved disagreement.

Where earn-outs are used, we focus on simplicity, influence and duration. We help design structures that sellers can realistically control, buyers can monitor without micromanaging, and both sides can live with emotionally as well as commercially.

Crucially, we spend time upfront on role clarity, authority and expectations during the earn-out period. This includes challenging assumptions on both sides and, where necessary, recommending alternatives to earn-outs that better reflect the realities of the business and the people involved.

Lexis Capital Group is particularly effective in situations where founder identity, control dynamics and trust are central to deal success. We are not advocates of clever structures for their own sake. We are advocates of deals that still make sense six, twelve and twenty-four months after completion.

In earn-outs, as in most of M&A, it is rarely the maths that causes the damage. It is the humans.