what-is-an-earn-out-in-an-loi-contractPublished: 2026-04-20 | Last Updated: 2026-04-20 | By: Scott Sylvan Bell | Location: Sacramento, California
How Does an Earn Out Clause Work Inside an LOI Contract?
Direct answer: An earn out clause inside an LOI contract is a provision where part of the purchase price gets paid to the seller only if specific performance metrics are hit after close. Typical LOI earn outs run 10-40 percent of purchase price over 2-5 years. Buyers use earn outs to de-risk deals when sellers claim aggressive growth. Sellers should negotiate baseline deal provisions, bonus earn outs, and clear formulas before signing. For broader earn out strategy, see our earn out guide.
This concept connects to three frameworks in the Exit Ratio 360™ system. The SELL Framework covers the work before accepting any earn out. The THREATS Framework covers the risks earn outs create. The EXIT Framework covers how earn outs fit the overall strategy.
Earn Out Structures Inside LOI Contracts
| Structure | % of Purchase Price | Time Horizon | Typical Metrics |
|---|---|---|---|
| Revenue-based earn out | 15-30% | 2-3 years | Annual revenue targets |
| EBITDA-based earn out | 20-40% | 3-5 years | Annual EBITDA thresholds |
| Milestone earn out | 10-25% | 1-3 years | Customer retention, launches |
| Hybrid earn out | 15-35% | 2-4 years | Multiple metrics |
| Baseline deal earn out | 10-20% | 1-2 years | Historical baseline hit |
| Bonus earn out | 5-15% upside | 2-3 years | Growth above baseline |
6 Negotiation Moves for Earn Outs Inside an LOI
- Require exact math formulas showing how earn out amounts calculate against specific metrics.
- Add a baseline deal provision — normal attrition of 5-10 percent does not reduce earn out.
- Negotiate a bonus earn out — if growth exceeds projections, you share 5-15 percent upside.
- Cap the earn out period at 2-3 years maximum to limit long-term buyer control exposure.
- Require buyer non-interference clauses protecting revenue, pricing, and staffing post-close.
- Include acceleration trigger if buyer sells the company during the earn out period.
Frequently Asked Questions About Earn Outs in LOI Contracts
Direct answer: These ten questions cover the most common topics about earn out clauses inside letter of intent contracts. Each answer runs 40-60 words with specific numbers and timeframes for voice search and AI citation.
What is an earn out in an LOI contract?
An earn out in an LOI contract is a provision where part of the purchase price gets paid to the seller only if specific performance metrics are hit after close. Typical earn outs run 10-40 percent of purchase price over 2-5 years. Buyers use earn outs to de-risk deals when sellers claim aggressive growth. Earn outs shift risk from buyer to seller.
What percentage of LOIs include earn outs?
Roughly 40-60 percent of mid-market LOIs include earn out provisions. The percentage rises to 70-80 percent in deals where sellers claim aggressive growth projections. Industry-specific deals (SaaS, healthcare, professional services) see higher earn out rates. Strategic acquisitions and private equity buyouts use earn outs less often. All-cash deals represent roughly 25-35 percent of mid-market closes.
How is the earn out amount calculated?
The earn out amount calculates against specific metrics stated in the LOI — revenue, EBITDA, customer retention, or milestone achievement. Typical formulas use tiered structures — 100 percent of earn out if target hits, 50 percent if threshold hits, 0 if miss. Well-drafted LOIs include worked examples with actual numbers. Vague formulas create disputes worth $500K-$5M+.
Should I accept an earn out in my LOI?
You should accept an earn out only if the cash-at-close portion exceeds 60 percent, the metrics are achievable under normal operations, the time horizon stays under 3 years, and buyer non-interference protections exist. Roughly 40-60 percent of earn outs achieve full payment. The remaining 40-60 percent pay partial or zero. Structure matters more than headline numbers.
What is a baseline deal in earn out negotiations?
A baseline deal in earn out negotiations is a provision that excludes normal business attrition from clawback triggers. If your business loses 5-10 percent of revenue annually as natural churn, the baseline documents that as acceptable. Losses above the baseline trigger earn out reductions. Always negotiate the baseline percentage explicitly. Without it, buyers claim normal churn as breach.
What is a bonus earn out?
A bonus earn out is a provision where the seller gets additional compensation if post-close performance exceeds projections. If your business grows 20 percent faster than expected, you share 5-15 percent of the upside. Bonus earn outs balance risk — sellers accept some downside through standard earn outs and capture upside through bonus structures. Few sellers negotiate bonus provisions despite their value.
How do buyers manipulate earn out metrics?
Buyers can manipulate earn out metrics by changing pricing, cutting marketing spend, reassigning key accounts, imposing corporate overhead charges, or delaying invoicing. Each tactic reduces revenue or EBITDA enough to miss thresholds. Protection requires buyer non-interference clauses, monthly financial reporting, audit rights, and specific restrictions on material operational changes during the earn out period.
Can an earn out continue after I leave the company?
Yes, an earn out can continue after you leave, but the risk increases significantly. When you lose operational control, buyer decisions directly affect your payments. Most sellers negotiate either earn out acceleration when they exit or strict non-interference clauses covering the earn out period. Continuing earn outs after departure without protections typically results in 30-50 percent payment reductions.
What happens if the buyer sells the company during earn out?
If the buyer sells the company during your earn out, you should have acceleration rights in the LOI. Acceleration means you receive the full remaining earn out balance at the time of the subsequent sale. Without acceleration language, the new buyer may refuse to honor the earn out, creating disputes worth $500K-$5M+. Always include acceleration provisions in LOI negotiations.
When should I refuse an earn out in an LOI?
You should refuse an earn out when the cash-at-close portion falls below 50 percent, when the time horizon exceeds 5 years, when metrics are controlled by buyer decisions, when baseline deal provisions are missing, or when formulas are vague. These patterns indicate the buyer plans aggressive post-close tactics. Walking away from bad earn out structures prevents 40-60 percent payment losses.
Full Transcript From the Video
Direct answer: The full cleaned transcript appears below. Location recorded: Sacramento, California.
If you are a business owner or entrepreneur and you are selling your business and you are under a letter of intent contract and it has got an earn out clause, what is this and why does it matter? This is a fantastic question. I am Scott Sylvan Bell, coming to you live from Sacramento, California.
You have got a company that you want to sell, YouCo, your company, and it is going to sell for $10 million because this makes easy math, 10 million bucks. You have made claims. You say, hey, consistently over the last four years, we have done $5 million, $6 million a year revenue, like clockwork, our sales work, our ads work. If you were to take over this business turnkey, you should absolutely hit these metrics fairly easy minus some sort of world cataclysm or financial collapse.
What I might do is go, great, you are telling me that your company is running and operating in a meaningful way, which is fantastic, that is why I want to buy it. But I want some fancy word insurance. We are not going to go buy insurance. You are going to leave money in and you are going to self fund what we are going to refer to as an earn out or a self-funded insurance policy.
What I am going to say is, if we hit these metrics year after year or time period after time period, you, my friend, are going to be rewarded with some financial rewards. We are going to give you all the money that we told you, but it is subject to you hitting those metrics. It is subject to you hitting the numbers that you said you could hit.
It is not uncommon for companies to do some sort of earn out provision on just about every contract. Some people it is an automatic standard 10 percent. Some of it is 20. It really depends upon the company, the industry, the service. If you see earn out provision or hold back provision, be aware that sometimes the math on those provisions will never work to your favor and they know it and you know it. This is where you can redline and negotiate in your letter of intent contract.
An earn out provision allows for someone to say, I am going to de-risk, I am going to remove some of the risk of this sale because there are risks on both sides. I saw a deal I was working on at the end of last year and the company wanted a large sum of seven figures, mid seven figures. They wanted everything. They wanted to take mid seven figures and walk away from the company.
My team was like, time out. We are not going to do this. You want mid seven figures? We are willing to give you mid seven figures, but we are not giving you one lump sum of cash. We are going to do a hold back provision of 10 or 15 percent. They said, there is no way. If we cannot just walk free and clear with cash, we are not doing this. So the team got together and they said, we are not doing this deal. It was a go, no-go situation.
You may decide to say, hey, I want all my money. I have given you every piece of documentation. I do not want to do an earn out because it is a subject-to clause. It is subject to those metrics being hit, or I do not like the way that you calculated out the money, or I do not like the terms that you gave us. I do not like the hold back period. It may be six months. It may be 12 months. It may be two years. Two years is about like, okay, three years, four years. It depends upon the sum.
You could also put in an earn out bonus. Let us say that your company was doing $6 million a year. You say, great, I am more than willing to assume some of this risk, but if these metrics jump and they jump significantly, I want a piece of that action. I want to do a baseline deal. I want to say, hey, I believe that my numbers are so good that when you take over this company, if you do not do anything to screw it up, that these numbers are going to jump, which I wanted to do. If it increases significantly, I want a piece of that action.
You get to write the deal however you want. It is a negotiation. An LOI contract is a negotiation. You get to ask for it. It does not mean they are going to get it. It does not mean that I am going to get it. It does not mean that you are going to get it. But be aware that as you take a look at these earn out provisions, you can say, hey, look, I will de-risk this too, as long as you are willing to play ball as well.