Selling on Hope: Why UK Earnouts Leave Founders with 50p on the Pound

Institutions take the cash. Founders take the risk.

Advisers across the UK and Europe typically see sellers collect between 40% and 60% of the earn-out pot, and around a third of earn-outs pay nothing at all. At the extreme end, the largest measured dataset, covering US private deals, puts the figure at 21p in the pound, with over 40% paying nothing. Once completion day passes, target profits run into shared corporate costs and fresh management priorities. My message to any owner weighing an offer is simple: before you sign away deferred consideration, see the mechanism for what it usually becomes, a heavy discount masquerading as future value.

The people asked to accept that discount are rarely the most experienced sellers in the market. When a private equity fund sells a portfolio company, it wants a clean break: a locked box, warranty and indemnity insurance, and cash it can hand back to its investors. It will rarely accept a material earn-out, and it has the negotiating weight to refuse.

Founders are a different story. The research we reviewed for this briefing puts earn-outs in 22% to 25% of UK private deals overall, rising to 41% when the seller is an owner-manager. The buyer wants you tied in through the handover, it has doubts about how the business performs without you, and contingent consideration covers both. What I find hardest to accept is the result: the least experienced sellers in the market carry the most deferred, unguaranteed price.

The smaller the deal, the bigger the bet, and the less of it you bank

Earn-outs are concentrated in the low to mid-market. That is exactly where we work at Deal Ascent. Below £25m, businesses lean on their founders, have thinner management teams and less formal reporting, so buyers push more of the price into the future. Above £100m, the locked box dominates and earn-outs become rare.

So what does a founder actually collect? I looked for a published UK or European dataset that tracks earn-out payouts, and there isn’t one. The best available view is M&A adviser experience: mid-market advisers typically see sellers collect between 40% and 60% of the maximum. On a £10m headline deal with £2.5m deferred, that means banking somewhere between £8.5m and £9.0m.

I treat the US data as the worst case. SRS Acquiom, which administers post-completion payments on thousands of US private deals, reports that earn-outs pay about 21 cents in the dollar outside life sciences, with 41% paying nothing at all. Put on the same £10m deal, that is £8.0m. I recognise the US is a different market: its deal structures, legal framework and appetite for litigation all differ from ours, and I would not apply its numbers directly to a UK sale. But the mechanism that erodes value after completion is the same on both sides of the Atlantic. That is why the 40% to 60% UK estimate deserves to be taken seriously: it is what a well-advised seller should expect, and the US figure shows how far below it a poorly protected one can fall. My advice is to plan for the bottom of the UK range, not the top.

The data also describes how earn-outs end, and in my view the shape matters more than the average. Around a third pay nothing, usually because a cliff target was missed by a margin. A further 35% to 45% pay in part, almost always where the SPA used a sliding scale. Only about one seller in four collects the full amount, and those deals tend to share two features: the seller kept control of the budget, or the target was measured on revenue rather than profit.

Buyers are winning the metric, and disputes are following

I tell every founder the same thing: which number the earn-out hangs on decides most of the outcome. Turnover is hard to manipulate and easy to audit. EBITDA sits below every cost decision the buyer will make once it owns your business. Across Europe the drafting is moving the buyer’s way.

The research reports what this means for owner-managed service businesses: earn-outs tied to fee income realise roughly 50% to 65%, but below 40% when tied to operating profit. That is an adviser estimate, not a measured figure, but the mechanism is plain to anyone who has sat through an earn-out calculation. Once you join a group, head-office charges, shared IT and central marketing land on your P&L, and every pound of them comes out of your earn-out.

Disputes are rising accordingly. In BRG’s 2026 survey of more than 200 M&A lawyers, private equity professionals and advisers, 35% cited earn-outs as a cause of disputes, 11 points higher than the year before.

English law will not fill the gaps

Many founders assume a court will step in if a buyer plays games. I want to be blunt about this. Under English law there is no general duty of good faith in a commercial contract. The House of Lords confirmed in Walford v Miles that an agreement to negotiate in good faith cannot be enforced. Yam Seng later opened the door to implied good faith in some long-term “relational” contracts, but courts have applied it sparingly, and it is no substitute for drafting. Without express covenants, a buyer can run the business in its own interests even where that wipes out your earn-out.

Even express covenants have limits. In Porton Capital v 3M, the sellers had negotiated obligations to market the product and pursue regulatory approval. The High Court found 3M in breach. The sellers had claimed around $56m and were awarded $1.3m after a 24-day trial, because the judge concluded sales would have been low anyway.

The drafting is where the value is won or lost

I cannot overstate this. Every protection in this briefing only works if the words in the SPA are precise: the definitions, the accounting schedule, the worked example and the covenants. A loose definition of “EBITDA” or “ordinary course” is an open invitation to argue, and the buyer usually wins that argument because it holds the books.

What I want to see in a UK founder’s SPA

These are the provisions we draft and negotiate into the earn-out on every Deal Ascent mandate.

1. Protect capital treatment: the tax trap that can cost more than a missed target

I start with tax because it is the threat founders most often miss, and I would argue the most expensive earn-out mistake is often not commercial. If HMRC decides the earn-out rewards your continued work rather than paying for your shares, it is taxed as employment income: income tax at up to 45% plus employee and employer National Insurance, usually collected through PAYE, in place of Capital Gains Tax at Business Asset Disposal Relief or main rates. On a seven-figure earn-out, that difference can exceed the amount at stake in any dispute about the numbers.

HMRC’s own guidance sets out what points to sale consideration: the SPA shows the earn-out is part of the price; its value reflects the shares given up; it is not a top-up for below-market pay; it does not depend on staying employed beyond what is needed to protect the business; it carries no personal performance targets; and sellers who leave receive it on the same terms as those who stay. Draft to match:

• Paid qua shareholder, not qua employee. The SPA should say the earn-out is further consideration for the shares, paid pro rata to shareholdings.
• No bad leaver trap. Earn-out rights must not be forfeited or reduced because employment ends. Deal with conduct through restrictive covenants and the service agreement instead.
• A separate, market-rate package. Any post-completion role carries its own salary and bonus, so the earn-out is not doing the job of remuneration.
• Paper earn-outs under s.138A TCGA 1992. Where the earn-out will be satisfied in buyer shares or loan notes, structure it so s.138A applies: the right is treated as a security of the buyer that is not a qualifying corporate bond, and no gain arises until the paper is sold. A seller can elect out, sometimes to secure Business Asset Disposal Relief at completion. That choice needs specialist tax advice.
• Clearance. Consider seeking HMRC clearance on the structure before completion.

2. A three-tier accounting hierarchy, with a worked example

Once the tax position is protected, the next fight is over the numbers. Most earn-out arguments are accounting arguments, and we settle them before signing with a schedule that ranks the rules in strict order.

We then append a pro-forma: last year’s actual figures run through the earn-out definition, line by line, to an agreed answer. I treat this as non-negotiable. It flushes out disagreements while you still have negotiating power, and gives an expert a template to follow later.

3. Pull the metric up the P&L

Our starting position is turnover. If the buyer needs comfort on quality, offer a gross margin floor or a recurring revenue measure. Do not accept a metric below the overhead line without the exclusions above.

4. Slide, don’t cliff

Cliff structures are the main reason around a third of earn-outs pay nothing. We insist on a sliding scale: nothing below a floor, full payment at target, a straight line in between, and a carry-forward if one year beats target and the next falls short.

5. Keep it short

The longer the earn-out, the harder it is to see your business inside theirs. Twelve to twenty-four months is the UK and European norm. Past thirty-six months, integration makes standalone results almost impossible to isolate.

6. Acceleration on change of control

If the buyer sells your business, sells itself or becomes insolvent during the earn-out period, the outstanding balance should fall due in full. Without this you are relying on a new owner who never agreed your deal.

7. Expert determination for the numbers, court only for conduct

Split the dispute clause. Calculation disputes go to an independent chartered accountant acting as expert, with a fixed timetable and the ICAEW appointing one if the parties cannot agree. The process is confidential and binding except for manifest error or fraud. Claims that the buyer breached a covenant or frustrated the earn-out are outside an expert’s remit and go to the Commercial Court or LCIA arbitration, which is slower and far more expensive. The better your accounting schedule, the more of any dispute stays on the cheap side of that line.