Secure Future Payments in M&A Deals –
In mergers and acquisitions, not all deals are straightforward cash-at-closing transactions. Many deals include earnouts—future payments tied to the company’s post-acquisition performance. But how can both parties ensure these payments are fair and secure?
That’s where earnout escrow comes in. At Secured Trust Escrow, we help buyers and sellers structure escrow agreements that protect everyone’s interests. In this guide, we’ll cover:
✔ What earnout escrow is and why it matters
✔ Common earnout structures and triggers
✔ How long funds stay in escrow
✔ Resolving disputes over earnout payments
What Is an Earnout Escrow?
An earnout is a deal structure where part of the purchase price is contingent on future performance (e.g., revenue targets, EBITDA goals, or customer retention). Instead of paying the full amount upfront, the buyer agrees to pay additional sums if certain milestones are met.
Earnout escrow is a secure way to hold these future payments in a neutral account until the conditions are fulfilled.
Why Use Escrow for Earnouts?
✔ Buyer Protection – Ensures payments are only made if targets are legitimately hit.
✔ Seller Protection – Guarantees funds are available and won’t be withheld unfairly.
✔ Reduces Disputes – Clear rules prevent disagreements over performance metrics.
Common Earnout Structures
Earnouts can be structured in different ways, depending on the deal’s goals:
1. Revenue-Based Earnouts
– Example: “Seller receives an additional $2M if annual revenue exceeds $10M in Year 1.”
– Best for: Companies with predictable sales cycles.
2. Profit/EBITDA Earnouts
– Example: “An extra $1.5M is paid if EBITDA margins stay above 20% for two years.”
– Best for: Businesses where profitability is more critical than top-line growth.
3. Milestone-Based Earnouts
– Example: “$500K is released upon FDA approval of a new drug.”
– Best for: Startups and R&D-heavy companies.
4. Hybrid Models
Combines multiple triggers (e.g., revenue + customer retention).
How Long Do Earnout Escrows Last?
Earnout periods typically range from 6 months to 3 years, depending on:
✔ The industry (tech deals may have shorter windows than manufacturing).
✔ The certainty of performance metrics (longer for unpredictable markets).
✔ The buyer’s and seller’s risk tolerance.
At Secured Trust Escrow, we help structure timelines that balance security with flexibility.
Key Challenges with Earnout Escrow (And How to Avoid Them)
1. Disputes Over Performance Metrics
– Problem: Buyers and sellers may disagree on whether targets were met.
– Solution: Define exact measurement methods upfront (e.g., GAAP accounting, third-party audits).
2. Buyer Manipulation
– Problem: A buyer might suppress sales to avoid paying an earnout.
– Solution: Include “good faith” clauses requiring the buyer to support growth.
3. Unrealistic Targets
– Problem: Overly ambitious goals lead to failed earnouts and resentment.
– Solution: Base targets on historical performance (not wishful thinking).
How Escrow Protects Both Parties
✔ Funds Are Secure – Money is held neutrally, so neither side can access it prematurely.
✔ Clear Release Triggers – Payments only happen when verifiable conditions are met.
✔ Dispute Resolution – Escrow agents (like us) help mediate conflicts objectively.
Case Study: A Successful Earnout Escrow in Action
The Deal: A California-based SaaS company was acquired for $15M upfront + $5M earnout based on 2-year revenue growth.
The Challenge: The seller worried the buyer might neglect marketing, hurting sales.
The Solution:
1. The $5M was placed in escrow with clearly defined revenue triggers.
2. A third-party auditor verified financials quarterly.
3. Funds were released automatically when targets were confirmed.
Result: The seller received the full $5M, and the buyer avoided litigation risks.
When Should You Use Earnout Escrow?
✅ Bridging valuation gaps (seller wants $20M, buyer offers $15M + $5M earnout).
✅ High-growth industries (where future performance is uncertain).
✅ Founder-led businesses (to incentivize a smooth transition).
Not ideal for:
❌ Distressed sales (where future performance is unlikely).
❌ Hostile takeovers (lack of trust undermines earnouts).
Earnouts can make or break an M&A deal. When structured properly—with a fair escrow mechanism—they align incentives and reduce risk for both sides.
Need Help Structuring an Earnout Escrow?
📞 Contact Secured Trust Escrow today—we’ll ensure your deal is secure and dispute-free.
