Deal Negotiation

How to Negotiate an Earnout When Buying an Online Business

Updated July 2026 · 8 min read · Deal Alert AI

An earnout is one of the most powerful tools in online business acquisitions — and one of the most misunderstood. Used correctly, it lets buyers acquire businesses that would otherwise be out of reach, protects against downside risk, and aligns seller incentives through the transition. Used incorrectly, it creates years of disputes and leaves both parties frustrated.

Here's everything you need to know about structuring and negotiating an earnout in an online business deal.

What an earnout is: A portion of the purchase price that is deferred and paid only if the business hits specific performance targets after closing. The seller gets paid the earnout if the business performs as they claimed. The buyer pays less upfront and less total if it doesn't.

When earnouts make sense

Earnouts bridge a valuation gap. They're most appropriate when:

The seller believes the business is on the verge of growth that hasn't materialized yet in the trailing numbers
Revenue has been inconsistent and the seller insists recent months are more representative than the TTM average
There's significant key person risk and the seller is willing to stay involved — the earnout incentivizes them to genuinely transfer the business
Due diligence raised questions that aren't definitively deal-killers but represent uncertainty
The buyer lacks capital for full upfront payment but wants to avoid leverage

Earnouts are less appropriate when the seller wants full payment upfront and the business is performing consistently. Don't try to impose an earnout on a seller who doesn't want one — it will kill the deal.

The two types of earnout structures

Revenue-based earnout

The seller earns an additional payment if the business hits specified revenue targets in the 12–24 months post-closing. This is more common in online businesses because revenue is straightforward to measure.

Example: "Buyer pays $400K at close. Seller receives an additional $100K if the business generates $200K+ in gross revenue in the 12 months post-close."

Revenue-based earnouts favor sellers in businesses with good top-line growth but compressed margins. Be careful: a motivated seller can sometimes hit revenue targets by discounting heavily or cutting profitable products, inflating revenue at the expense of the margins you actually care about.

Profit-based earnout

The seller earns an additional payment based on net profit (SDE or EBITDA) targets. This is better aligned with buyer interests because it doesn't incentivize margin sacrifice.

Example: "Buyer pays $400K at close. Seller receives an additional $100K if SDE exceeds $100K in the 12 months post-close."

Profit-based earnouts are harder to manipulate — but also require clear agreement on what counts as an allowable expense. Define the expense baseline in the purchase agreement to prevent disputes.

Earnout negotiation tactics

Anchor on trailing performance, not projections

The baseline for earnout targets should always be rooted in verified trailing numbers, not the seller's projections. If they claim the business is "about to double," structure the earnout so they get paid if it actually does — not for you to pay full price for a doubling that may not happen.

Cap the earnout period at 12 months

24-month earnouts sound appealing because they give more time for performance to materialize. In practice, longer earnouts create more disputes and keep you legally entangled with the seller long after you want to be operating independently. Keep it to 12 months whenever possible.

Include a floor and a ceiling

Negotiate clear thresholds. Below the floor (e.g., 80% of baseline revenue), no earnout is owed. At or above the ceiling (e.g., 120% of baseline), the full earnout is paid. In between, pay a pro-rated amount. This structure is fair and eliminates arguments about technicalities.

Specify the measurement methodology upfront

Define everything in writing: which revenue figures count (gross or net? which payment platforms? which products?), how SDE is calculated, which expenses are excluded, and who performs the measurement. Disputes about earnouts almost always come from ambiguous definitions, not bad faith.

Is this business priced fairly before the earnout? Paste any listing from Empire Flippers or Flippa into Deal Alert AI for an instant valuation check and risk score before you decide whether an earnout structure makes sense.

Protecting yourself as the buyer

Earnouts can be gamed by a motivated seller, particularly if they retain operational involvement. Protect yourself with these provisions:

Non-compete and non-solicitation clause

Always include both. The seller should not be able to launch a competing product or solicit your customers during the earnout period. Define the geographic scope, time period, and competitive activity clearly.

No clawback of operational decisions

Make clear in writing that you retain full operational control post-close. The seller cannot claim the earnout was missed "because you changed the pricing" or "because you stopped running their ads." Your decisions are your decisions — the earnout is based on outcomes, not methods.

Escrow or secured obligation

If the earnout is seller-financed (seller is extending credit to the buyer for the earnout amount), require the business assets to secure the earnout obligation. This protects both parties: the seller has a claim against the assets, and the buyer can't default and keep the business free and clear.

What sellers need to understand about earnouts

Earnouts aren't punishment — they're alignment. When a seller truly believes their business is growing, an earnout lets them capture the upside of that growth. A seller who refuses any earnout on a business with inconsistent or recent-spike revenue is essentially asking the buyer to fund their optimism at face value.

The counterargument is real: after closing, the seller no longer controls outcomes. A new owner's decisions — good or bad — determine whether the earnout is hit. This is why earnout periods should be short and targets should be based on trailing performance, not projections. The seller needs a reasonable chance to hit the target based on what already happened, not on what might happen under different management.

The earnout negotiation framework: Start with full-price LOI. If seller accepts, no earnout needed. If there's a valuation gap, propose a structure where seller gets full price if their claimed performance is real — paid partially at close, partially over 12 months based on results. Frame it as "I believe your numbers — this just makes it official." A confident seller will accept. A seller who knows something you don't will resist.