Earnout Prevalence and Structure Differences Across Deal Sizes
Smaller deals rely on earnouts far more often and stake larger portions of the sale price on them.
Earnout prevalence and structure in M&A are not uniform. They follow a clear gradient tied to deal size: smaller transactions see earnouts more often, stake a larger share of the price on them, and structure them in ways that expose sellers to more risk than their counterparts in larger deals. Understanding that gradient matters for any owner approaching a sale, because the market-wide statistics that get quoted most often describe an average that applies to almost no one.
Why earnouts exist, and how they differ from deferred purchase price
An earnout ties part of the purchase price to how the business performs after closing. If the company hits an agreed target, the seller gets paid. If it falls short, the payment shrinks or disappears. That contingency is the whole point, and it separates an earnout from deferred purchase price, which is simply money owed later regardless of how the business does afterward. A seller note or a delayed payment schedule carries credit risk, the risk that the buyer won't pay. An earnout carries performance risk, the risk that the business won't hit the number both sides agreed to.
CRA International's March 2026 analysis makes the distinction precise: an earnout is a deliberate exchange in which the seller accepts contingent consideration instead of a fully certain price, and the buyer takes operational control of the business subject only to the milestones both parties signed off on. That framing matters because it tells you what each side is actually trading. The seller gives up certainty today in exchange for the chance at a higher total price later. The buyer gives up some of the discount they might have negotiated in exchange for not having to pay for performance that hasn't happened yet.
Fastho ff Law's 2026 practitioner note draws out a consequence visible constantly in deal documents: labeling a fixed installment payment an "earnout" creates uncertainty that doesn't need to exist, while labeling a genuinely contingent payment "deferred price" hides the conditions that determine the buyer's obligation to pay, and the label carries real weight. It carries legal weight in how a dispute gets resolved and tax weight in how the payment gets treated. The deeper reason earnouts exist at all comes down to information. In a private-company sale, the seller knows things about the business that no amount of due diligence fully uncovers, how a key customer relationship actually works, whether a recent sales spike is durable, how much of the operation depends on the owner personally. The buyer can't verify all of that before closing. Pushing part of the price onto post-closing results is a rational response to that gap, not a sign that either side distrusts the other.
How common earnouts are across the market
CRA International's March 2026 analysis reports that earnouts appear consistently across market cycles, through downturns and booms alike. But the same analysis flags something that changes the meaning of that consistency: earnouts are being used more actively in smaller deals, where the information gaps described above tend to run largest. A single prevalence figure for "the M&A market" averages across businesses that have almost nothing in common, from a founder-run service company with a handful of customers to a large, professionally managed target with audited financials going back a decade.
A&O Shearman's July 2025 Harvard Law Forum post supplies a useful non-life-sciences baseline: outside life sciences, close to one in five private transactions used an earnout over the past decade. That rate moved over time, rising from a lower base in 2019, peaking sharply in 2023, then settling back by 2024 to something close to the decade's average. Life sciences sits in a category of its own and should be treated separately from the rest of the market. A&O Shearman reports that private pharmaceutical transactions have used earnouts in over 80% of deals in recent years, a rate driven by regulatory approval risk and clinical-trial uncertainty that simply has no equivalent in a founder-led manufacturing business or a regional service company.
Setting life sciences aside, the number that matters most for most business owners is not the one-in-five market-wide figure but what happens to that figure as deal size moves up or down. A single aggregate rate cannot tell a seller whether to expect an earnout in their own transaction, because the rate at the small end of the market and the rate at the large end are not the same number wearing different clothes. They are genuinely different probabilities, and the next section breaks that gradient down directly.
The size gradient in earnout prevalence: smaller deals see earnouts far more often
CRA International's March 2026 analysis states the gradient directly: earnouts are being used more actively in smaller deals because of greater information asymmetry in those transactions.
Larger deals tend to come with the infrastructure that reduces uncertainty: third-party quality-of-earnings reports, audited financial statements going back several years, institutional buyers and sellers on both sides of the table who have been through dozens of transactions before. That infrastructure lets both parties price the business with more confidence, which reduces the need to defer part of the price onto future performance. Smaller businesses usually lack that infrastructure. Financial records are often prepared internally. The buyer often has fewer comparable transactions to draw on. And the business itself frequently depends on one person, the owner, in a way that a larger, more institutionalized company does not.
That owner-dependence compounds the asymmetry in a specific way. When the seller is the rainmaker, the key relationship holder, or the only person who fully understands how the operation runs, a buyer has a rational reason to want to see the business perform without that owner's daily involvement before paying the full price. An earnout becomes the mechanism for testing that transition. For an owner selling a profitable business in the lower-middle market or the small-business range, the practical lesson is to treat an earnout as the likely outcome of a negotiation rather than an unusual term to push back against on principle. Preparing for that probability, rather than being surprised by it at the term sheet stage, changes how a seller can negotiate the details that matter most: the proportion of price at risk, the metric used, and the length of the measurement period. Those details are where the next two sections turn.
How the earnout's share of the total price changes with deal size
Prevalence is only half the picture. Even where an earnout exists, the proportion of the total price it represents also moves with deal size, and it moves in a direction that matters a great deal to smaller-deal sellers.
A&O Shearman reports that outside life sciences, the median earnout size as a share of closing payments fell slightly in 2024 compared with 2023. Life sciences sits well above that range. A&O Shearman puts the life sciences median earnout share of total consideration far higher than the non-life-sciences figure, a reflection of how heavily biotech and pharma deals lean on post-closing regulatory and clinical milestones. Setting life sciences aside again, the pattern that matters for most owners runs by size band: smaller transactions show higher median earnout proportions than mid-sized deals, and mid-sized deals in turn show higher proportions than the largest transactions in the market. The share of the purchase price that a small-business owner has to earn back after closing runs structurally larger than what a seller in a large transaction typically faces.
That has a direct consequence for how a seller should think about the number on the term sheet. A seller who treats the full earnout amount as guaranteed proceeds is planning around an outcome that the payout data, discussed in full in the final section below, shows most sellers don't actually reach. The proportion of the price sitting in the earnout bucket, not the headline deal value, is the number that should drive a seller's financial planning. KAS Advisors' July 2026 analysis states the principle: treat the earnout as upside, not as price. That framing carries the most weight exactly where the earnout represents the largest share of the deal, which, given the size gradient just described, means it carries the most weight for the owners least equipped to absorb the risk if the earnout falls short.
How earnout duration and metric choice differ by deal size
Two structural choices round out the picture: how long the earnout period runs, and what metric triggers payment.
On duration, A&O Shearman reports a median earnout performance period of 24 months for non-life-sciences transactions. Life sciences deals typically run 3 to 5 years or longer, a gap driven by regulatory approval timelines and clinical trial phases that simply don't exist in most commercial businesses. That contrast lines up with the prevalence numbers discussed earlier: earnout use outside life sciences stood at only 15% in 2019 according to industry tracking, well below the roughly one-in-five decade average, before climbing toward its 2023 peak. A shorter measurement period caps the total window of exposure, which sounds like an advantage for the seller. But it cuts both ways: a business transitioning to new ownership rarely performs at full capacity in its first month, and a short window gives less time to recover from a slow start before the clock runs out.
Metric choice carries more weight than duration, and it connects directly to the dispute risk covered in the next section. A&O Shearman identifies revenue as the most commonly used metric, with EBITDA close behind. Revenue is a top-line number, harder to manipulate through cost allocation or accounting changes after closing, and that is why sellers tend to prefer it. EBITDA often ends up as the negotiated middle ground between the two preferences, but it's a compromise that still runs through operating costs the buyer controls after the deal closes.
CRA International notes that deals increasingly layer in multiple metrics at once, combining financial benchmarks with non-financial ones such as clinical trial success or FDA approval in life sciences deals. More metrics can sharpen precision about what's being measured, but each added metric is also another way to miss the target.
Deal size shapes which side of this negotiation a seller actually gets to have. In smaller deals, sellers often come to the table with weaker negotiating leverage and without specialized M&A counsel focused on earnout mechanics. That combination makes them more likely to accept EBITDA-based earnouts with few protective covenants attached, the exact structure most exposed to buyer decisions about overhead allocation and accounting policy made after the deal closes.
Fastho ff Law's 2026 note lays out why EBITDA is the metric that demands the most detailed contract language of any earnout structure. Management fees, transaction expenses, owner compensation, stock-based compensation, restructuring costs, overhead allocation, and whether a given cost gets treated as an operating expense or a capital expenditure can all shift the final EBITDA number, and the seller typically has no control over any of those decisions once the buyer owns the company. Revenue isn't immune to the same dynamic either. The same source notes that pricing decisions, discount policies, sales timing, customer allocation, and revenue-recognition choices can all move a revenue-based earnout up or down. That's why the accounting standard applied, the revenue streams included, and the exclusions carved out all need to be spelled out in the agreement upfront.
Why earnout disputes concentrate in smaller deals
Put the pieces together and a pattern emerges. Smaller deals see earnouts more often. When they do, a larger share of the price sits inside the earnout at closing. And those same smaller deals lean toward EBITDA-based metrics with fewer protective covenants, negotiated by sellers with less specialized counsel and less leverage. Each of those features on its own raises risk modestly. Combined, they concentrate dispute risk, and depressed payout outcomes, squarely in the smaller-deal segment of the market.
The payout data gives a sense of the scale involved. KAS Advisors' analysis reports that even among earnouts that pay out something, sellers collect only about half of the maximum amount on average, and a meaningful share of earnouts pay nothing. That shortfall means a seller who planned around the full headline number was planning around an outcome that, on average, doesn't happen.
Why does the payout fall short so often? The mechanism runs through control, not bad faith. Once the deal closes, the buyer sets budgets, allocates overhead, decides which new business opportunities to chase, and may fold the acquired company into a larger division in a way that makes the original earnout metrics difficult to isolate cleanly. None of that requires the buyer to act in bad faith. A buyer integrating a new acquisition into existing operations, reallocating shared costs, or redirecting sales priorities is making ordinary post-closing decisions, not engineering a shortfall. But those ordinary decisions still shape whether an EBITDA target gets hit, and the seller, having given up operational control at closing, has little ability to stop them.
That's the throughline connecting every section above. A mechanism built to bridge a valuation gap and share risk fairly between buyer and seller turns into a source of real financial exposure once it lands in a transaction where the earnout share is large, the metric is EBITDA, the covenants are thin, and the seller has limited leverage to negotiate otherwise. Those conditions concentrate at the smaller end of the deal-size spectrum. The size gradient running through prevalence, proportion, duration, and metric choice is the reason smaller-deal sellers carry the most earnout risk in the market, and understanding that gradient before signing a term sheet matters as much as understanding the headline price itself.
