The earnout is one of the most commonly misunderstood — and most commonly misused — tools in M&A deal structures. Buyers love them. Sellers often accept them without fully understanding the risks. Disputes over earnout payments are among the most common forms of post-close litigation in healthcare M&A.
This guide explains exactly what earnouts are, when they make sense for home care sellers, the terms to negotiate, and the situations where you should push back hard or decline entirely.
An earnout is a contingent purchase price mechanism that provides additional compensation to the seller if the business achieves certain performance benchmarks after the transaction closes.
Basic example:
Buyer pays $8M at close, with an additional “earnout” of up to $2M if the agency’s EBITDA exceeds $2M in the 12 months following close.
From the headline perspective, this looks like a $10M deal. In reality, it is an $8M deal with a conditional option to receive $2M — one the seller may or may not ever collect.
Buyers propose earnouts for a reason — usually one of three:
1. Valuation gap. The buyer and seller agree the business is worth somewhere between $7.5M and $10M, but they can’t agree on a precise number. The earnout bridges the gap by saying: “You’ll get $10M if you’re right; $7.5M if we’re right.”
2. Revenue concentration risk. If your agency depends heavily on a few key referral sources or clients, the buyer may structure an earnout to protect against the risk that those relationships don’t transfer post-close.
3. Founder dependency. If the business depends heavily on the owner’s relationships or clinical leadership, the buyer uses an earnout to align the seller’s incentive to stay engaged and transition effectively.
In each case, the earnout transfers risk from buyer to seller. The key question for every seller is: is that risk-transfer fair and is it priced fairly?
Earnouts are not inherently bad. There are situations where they are appropriate and can genuinely benefit sellers:
If your agency had an exceptional year that you believe is repeatable but the buyer is skeptical of, an earnout lets you “prove it” and get paid accordingly. If you’re right, you get more. If the buyer is right and performance reverts, the earnout compensates for the risk they took.
Seller requirement: You must have operational control over the business post-close for this to be fair. If you have no control over staffing decisions, marketing spend, or operational policy, you can’t be responsible for hitting a revenue target.
If the business genuinely depends on you — your clinical license, your referral relationships, your community reputation — it is not unreasonable for a buyer to require some portion of the purchase price to be contingent on a successful transition. This aligns your incentives with the buyer’s.
Seller requirement: The transition period should be defined, the earnout tied specifically to metrics within your control during that period, and the duration should be short (12 months is reasonable; 36 months is not).
If you are rolling equity and staying on as a division CEO with a specific growth mandate — new geography, new service line — an earnout tied to that growth can make sense because it compensates you for the incremental work you’re agreeing to do.
This is the most common earnout problem in home care. After close, the buyer controls:
Yet the earnout requires you to hit a revenue or EBITDA target that depends on all of these variables. The target is effectively in the buyer’s hands. You are being asked to accept risk you can no longer control.
Standard clause to negotiate: Any earnout agreement should include explicit language that the buyer will not take actions that “materially and adversely affect the seller’s ability to achieve the earnout” — and specific examples of prohibited actions (staff reductions, billing system migrations, referral source changes).
If the earnout is based on EBITDA — and the buyer controls the accounting — how do you verify you’ve hit the target? EBITDA can be influenced by cost allocations, intercompany charges, or simply management decisions about how to classify expenses.
Requirement: Earnout metric should be as close to gross revenue as possible (harder to manipulate) rather than EBITDA. Or, if EBITDA-based, the agreement should specify the exact accounting method, chart of accounts, and cost allocation methodology that will apply — and give the seller audit rights.
A 3-year earnout is a long time to be emotionally and financially tethered to an outcome you may not control. The first year post-close, you may still have operational influence. Three years post-close, you are likely a consultant or an observer.
Requirement: Push for 12-month earnouts. Accept 18 months in compelling circumstances. Resist 24+ month earnouts, which primarily serve buyers.
A cumulative earnout (total revenue or EBITDA over 24 months must hit $X) is almost always worse for sellers than annual targets. A missed year cannot be caught up.
Requirement: If multiple years are involved, ensure each year has its own independent target — and that a good year carries forward if the annual target is exceeded.
If an earnout is part of your deal, here is what to negotiate:
1. Earnout metric: Revenue is better than EBITDA (less manipulable). EBITDA is better if cost allocations are explicitly defined.
2. Accounting methodology: Specify the exact method for calculating the earnout metric. Any changes to accounting method require mutual written consent.
3. Buyer conduct restrictions: Buyer may not make material operational changes without seller consent during the earnout period if those changes are reasonably likely to reduce performance below the target.
4. Monthly reporting: Seller receives monthly financial reports against the earnout metric.
5. Audit rights: Seller (or seller’s accountant) has the right to audit earnout calculations within 60 days of each earnout payment notice.
6. Dispute resolution: Disputes referred to an independent accounting firm, not litigation. This is faster and cheaper.
7. Acceleration clause: If the buyer sells the business during the earnout period, the earnout accelerates and is paid in full. Otherwise, buyers can sell the platform (capturing value you helped create) while you are still waiting for your earnout.
8. Anti-assignment provision: The earnout obligation cannot be assigned to a shell entity or subsidiary with limited assets. The obligation stays with the entity that has the financial resources to pay.
Studies of M&A earnout disputes consistently show that a large percentage of earnouts are never paid in full — and a significant proportion generate litigation.
In healthcare specifically, the combination of regulatory complexity, billing system migrations, and management changes creates ample opportunity for disputes. Buyers who structure deals with earnouts often have more experience managing earnout disputes than sellers do.
The best protection is not better dispute resolution language — it is minimizing the earnout in the first place through a competitive process that produces clean, upfront pricing.
A well-run competitive M&A process with multiple qualified buyers removes the buyer’s ability to use an earnout as a valuation gap bridge. If five buyers are competing for your agency, none of them can get away with a large deferred payment — because their competitors will offer more cash upfront.
Earnouts are a tool that buyers use to transfer risk to sellers — and they are often proposed when buyers are uncertain about some element of your business. Accepting an earnout without carefully negotiating its terms is one of the most common ways home care sellers leave money on the table.
Our recommendation: work with an advisor whose goal is to structure a process that minimizes the need for earnouts by creating genuine competition. When they are necessary, negotiate every term with experienced M&A counsel.
Talk to Hendon Partners about structuring your deal to minimize earnout risk →
Hendon Partners is a sell-side M&A advisor for home-based care. We have structured dozens of home care transactions and negotiated earnout terms extensively.
Newsletter
Receive new articles, EBITDA benchmark updates, and deal intelligence directly in your inbox. No spam — unsubscribe anytime.
Join 1,200+ home care executives. Unsubscribe anytime.
