GLOSSARY
What Is Earnout? | Agency M&A Definition
An earnout is a deal structure where a portion of the purchase price is contingent on the agency achieving specific performance targets after closing. It bridges the gap between what a seller believes the business is worth and what a buyer is willing to guarantee upfront. Earnout payments are typically tied to revenue retention, EBITDA thresholds, or client retention metrics over a one-to-three-year period.
Earnout in Agency M&A
Earnouts are extremely common in marketing agency acquisitions — some estimates suggest they appear in 60-70% of deals. The reason is straightforward: agency value is heavily tied to people and relationships, both of which can walk out the door after a sale. A buyer paying $3M for an agency wants assurance that the clients and talent that generated the historical earnings will still be there in 18 months.
When selling a digital marketing agency, the earnout structure deserves as much scrutiny as the headline price. Sellers should push for metrics they can control — revenue retention rather than profitability targets, since post-acquisition cost decisions typically fall to the buyer. The measurement period matters enormously: a 12-month earnout is far less risky for a seller than a 36-month arrangement where organizational changes, new management, or strategic pivots could undermine performance. Sellers should also negotiate clear definitions of what counts toward earnout calculations, dispute resolution mechanisms, and protections against the buyer deliberately undermining earnout targets by reassigning clients or cutting resources. In the UK market (£-denominated deals), earnouts tend to be structured over longer periods, often 24-36 months, reflecting different market conventions.
How Earnout Affects Agency Valuation
Earnouts directly affect the risk-adjusted value of a deal. A $2M acquisition with $500K in earnout is not a $2M deal — it is a $1.5M guaranteed deal with upside potential. Sellers should discount earnout payments by their probability of achievement when comparing offers. An all-cash offer at 4.5x EBITDA is often worth more in practice than a 6x offer where 30% is tied to aggressive earnout targets. From the buyer’s perspective, earnouts reduce downside risk and align the seller’s incentives with post-acquisition performance. The most contentious earnout negotiations center on whether the buyer can make operational changes that affect earnout metrics — sellers need contractual guardrails to prevent this.
Example
A branding agency with $480K EBITDA accepts a $2.88M acquisition (6x EBITDA) structured as $1.92M at closing (67%) and a $960K earnout paid in two equal installments. The first $480K installment requires maintaining at least 90% of trailing twelve-month revenue through year one. The second $480K requires hitting $520K EBITDA in year two. The seller hits the revenue target in year one and collects $480K. However, the buyer hires three additional staff members in year two, pushing costs up and dropping EBITDA to $470K — just below the threshold. The seller misses the second earnout, receiving $2.4M total instead of $2.88M.
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