What the clause has to define
The metric. The accounting books that compute it. Add-backs that are frozen. Who can move work, change pricing, or shut a cell. How disputes are decided. What happens if the seller dies or is fired. Earn-outs in manufacturing deals is the mechanics owner. Seller-side financing is the seller companion.
BizBuySell’s manufacturing median of 2.75x SDE is a cash-and-close statistic on sold files, not a reason to paper over a valuation gap with a hope clause (Source: BizBuySell). If the gap is concentration or a single program, write that.
What an earn-out is not
It is not SOP 50 10 8 equity. SBA’s 10% change-of-ownership injection is cash and, at most, half standby seller paper (Source: SBA). An earn-out does not fill that hole. It is not a working-capital true-up. It is not a bonus plan for the floor.
Census CBP 2023’s establishment file is why many earn-outs sit on owner-operated shops that still need the seller to hold the key customer (Source: Census CBP). That is a retention instrument. Price it as one.
| Instrument | Certainty | Typical use |
|---|---|---|
| Cash at close | High | Core enterprise value |
| Seller note | Scheduled | Structure / gap |
| Earn-out | Contingent | Disputed forecast |
When is a lower cash price the cleaner tool?
When the buyer will not let the seller run the metric, when the program is ending, or when the books cannot isolate the earn-out P&L. A smaller certain number beats a beautiful clause on a commingled job shop.
How a plant metric should be written if you still use one
Prefer a unit or a named program over “company EBITDA” on a job shop that will be folded into a platform. If you must use EBITDA, freeze add-backs, allocations of corporate overhead, and the treatment of the seller’s own compensation. Name the accounting firm that computes it. Name the dispute path. Name what happens if the buyer sells the cell.
Retention earn-outs on a single customer are honesty. They are also fragile. If that customer’s procurement policy forbids seller contact after close, you have written a hope clause. Write a lower cash price instead.
Do not stack an earn-out, a large current-pay note, and a thin cash close unless the model still works when the earn-out pays zero. The glossary will not price your gap. Earn-out versus lower cash price is the decision owner.
Isolation
The glossary keeps earn-out, note, and peg apart. The FAQ holds the question. Jason Taken is a business broker. Educational information only. Counsel drafts the clause.
When the gap is real and the metric can be isolated, book a confidential intro call.
Books the buyer will control, and why that sentence matters
After close the buyer owns the chart of accounts. If the earn-out is “EBITDA of the acquired cell,” the buyer can allocate corporate rent, a new ERP, and a cousin’s salary into that cell. Freeze the allocation rules or do not use EBITDA.
Unit earn-outs and named-program earn-outs are harder to game and easier to count. Use them when the gap is a program. Use a lower cash price when the books cannot isolate anything. The compare owner is that decision.
Consulting agreements that are secretly earn-outs
A “transition fee” that only pays if revenue holds is an earn-out with a costume. Write it as an earn-out or write it as a true time-and-materials consulting agreement with a cap. Mixing them confuses tax, SOP, and the floor.
A CIM should not hide contingent price inside “seller will stay involved.” Name the metric, the period, and who controls the books after close — or drop the clause and take a lower cash number. Bring the gap you are trying to paper and whether that gap is a named program, a customer, or a hope. If it is a hope, bring a lower cash number instead. Earn-out versus lower cash price is the decision. After the contingent-price noun is straight, a confidential intro call is the conversion path.
What an earn-out is not
It is not a seller note. A note is debt. This clause is contingent price. It is not SOP equity. It is not a consulting agreement that only pays if revenue holds. After close the buyer owns the chart of accounts. If the metric is “EBITDA of the acquired cell,” the buyer can allocate corporate rent, a new ERP, and a cousin’s salary into that cell. Freeze the allocation rules or do not use EBITDA. Unit earn-outs and named-program earn-outs are harder to game. Use a lower cash price when the books cannot isolate anything.