For many business owners, realizing the full value of their company does not happen when they close on the sale of their business. Instead, deals often include contingencies or earnout periods. In these cases, a buyer agrees to pay additional money to a seller, provided the company hits certain targets or milestones.

“While earnout mechanisms are great in theory, it is difficult to fully protect against all the ‘what if’ scenarios from the seller’s perspective, especially when they cede control of the business,” said Michael Schroeder, managing director and shareholder at Taureau Group. “Fundamentally, a buyer is focused on maximizing its long-term value post-transaction, which may not align with maximizing the payout for a seller and is a big reason earnouts become contentious pre- and post-transaction.”

BizTimes asked experts at Milwaukee-area investment banks to weigh in on common pitfalls with earnouts and how to avoid them. Here are their responses:

Robert Jansen, managing director, Bridgewood Advisors

“Based on decades of experience structuring and negotiating earnouts alongside sophisticated acquirers, it’s clear that the best outcomes come from aligning incentives with strategic priorities that drive real value. The most effective earnouts are clearly defined, measure what matters, and rely on metrics that sellers can actually influence. For disciplined acquirers, earnouts are a valuable tool to reward performance, reduce risk and support a smoother integration.”

Michael Schroeder, managing director and shareholder, Taureau Group

“In the case of a strategic transaction, strong operational covenants both positive and negative are important. For example, covenants that limit the buyer’s ability to divert sales to other divisions or affiliates, limitations on the sale of assets or IP, or minimum budgets for marketing or sales staff help protect against future disputes.”

Crystal Flick, director, TKO Miller

“One of the most common pitfalls of earnouts is the complexity and uncertainty measuring the metrics they rely on, particularly as the business can change significantly after a transaction. Earnouts can also create unintended adverse incentives, encouraging singularly focused behavior that may undermine the company’s long-term health. The best way to mitigate these risks is to structure the earnout in a simple, measurable and short-term manner – or better yet, negotiate a clean, contingency-free deal.”

John Emory Jr., president, Emory & Co.

“Sellers are generally better off the higher up the income statement the earnout is calculated, so, for example, a revenue-based earnout could be preferred to one based on net income. If using an earnout based on profits, the seller needs language detailing how the earnout will be calculated and how changes in operations or expenses by the new owner would affect the calculation.”