Structuring Earnouts in SaaS Acquisitions: A Practical Guide
When to use earnouts, how to structure them fairly, and the common pitfalls that lead to disputes.
By AcquiCheck Research
An earnout is a portion of the purchase price that depends on the business meeting certain targets after the sale. They're increasingly common in SaaS acquisitions, and when structured well, they can bridge the gap between what a buyer and seller think a business is worth.
When earnouts make sense. Earnouts work best when there's genuine uncertainty about a specific aspect of the business. The seller claims a big client is about to sign but it hasn't closed yet. Revenue is growing rapidly but the trend is only 3 months old. A new feature is driving signups but hasn't yet converted to paid users. In all these cases, an earnout lets the seller benefit from the upside while protecting the buyer from the downside.
Common earnout structures. Revenue-based: the most common. "If MRR stays above $5K for 6 months, seller receives an additional $15K." Simple, measurable, and tied to what matters. Retention-based: "If net revenue retention stays above 95% for 12 months, seller receives X." Good when churn is the key risk. Milestone-based: "If the enterprise client renews their annual contract, seller receives X." Appropriate for specific known risks.
The key principles. Keep it simple. The more complex the formula, the more likely a dispute. Use metrics that are independently verifiable (Stripe data, not self-reported). Set a clear measurement period (typically 6-12 months). Define exactly how the metric will be calculated, including edge cases.
How much to put in earnout. A common range is 10-30% of the total purchase price. Less than 10% isn't meaningful enough to matter. More than 30% makes the seller feel like they're not really selling. For deals where the due diligence reveals moderate risk factors, 15-20% is typical.
Common pitfalls. Buyer sabotage: the buyer intentionally lets the product decline to avoid paying the earnout. Mitigate this with a "commercially reasonable efforts" clause. Metric manipulation: using different calculation methods post-close. Mitigate by defining calculations explicitly in the agreement. Disputes over cause: if MRR drops, was it the buyer's changes or market conditions? Mitigate by using metrics the buyer can't easily influence in the short term.
Our recommendation. If the AcquiCheck report identifies specific risks, suggest tying the earnout to those risks specifically. Revenue concentration? Earnout tied to the key account renewing. Declining traffic? Earnout tied to MRR maintaining a floor. This aligns incentives and protects both parties.
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