Earnout in an Ecommerce Acquisition: How It Works (2026)

An earnout is a slice of the purchase price that the buyer pays after closing, and only if the business hits an agreed target. That is the whole idea. The seller gets paid more if the brand performs, and the buyer pays less if it does not. If you are asking "what is an earnout" because one is sitting in an offer, the rest of this post covers the terms that decide whether it pays out or turns into an argument.

I have reviewed 50+ ecommerce acquisitions, and earnouts come up on a lot of them. They are not evil. But the headline price in a deal with an earnout is not the price you will be paid. Treat it as a ceiling, not a number. This is an operator's explainer, not legal or tax advice. Your lawyer and your CPA should review any earnout before you sign it.

What an earnout is, in plain terms

The earnout meaning is simple. The price has two parts. One part is paid at closing. The other part is paid later if the business meets a target, such as a level of gross profit over the next 12 months.

In a purchase agreement it shows up as an earn out agreement section, or a clause inside the main contract. It names a metric, a measurement period, a payment amount and who controls the books. My letter of intent template has a line for it, and the rule I put there applies to everything below: if the metric cannot be read off a report both sides can open, it does not belong in the deal.

Why buyers propose an earnout

Two reasons, and both are legitimate.

The valuation gap. The seller wants one number. The buyer will only pay a lower one. An earnout lets the buyer say yes to the seller's number on paper, while paying the difference only if the business proves it.

Handover risk. Many ecommerce brands are owner-dependent. Supplier relationships, ad account knowledge and listing history sit in the founder's head. If revenue dips after the handover, the buyer has overpaid. An earnout hedges that.

Here is the part sellers miss. The buyer is not just hedging. The buyer is also moving risk to you. My honest take: earnouts favor the buyer. You carry risk on performance you no longer control. That is why an all-cash offer at 2.5x often beats a 3.5x offer with earnouts. The higher number is a headline. The all-cash number is a price.

The villain: just take the headline price

The pitch sounds like this: we can get you to the higher multiple, part of it is performance-based, but it is basically guaranteed if you keep doing what you are doing.

Do not accept that framing. If it is basically guaranteed, the buyer should pay it at closing. If it is not guaranteed, part of the price is a bet, and you should price the bet. Ask what the buyer would pay in cash. Compare that to the cash at close plus a realistic haircut on the earnout. Then decide.

The alternative is not to refuse every earnout. It is to price the earnout on a metric both sides can audit, and to write the operating rules into the purchase agreement. The rest of this post is how.

Choosing the earnout metric: revenue, gross profit or SDE

This is where earnouts are won and lost. Three common choices.

Metric	What it rewards	Where it breaks
Revenue	Top-line growth	Can be bought with ad spend and discounts, so the target is hit while the buyer loses money
Gross profit	Profitable sales after product and marketplace costs	Closest to what the buyer pays for, but only if every cost line is defined in writing
SDE	Owner earnings	Depends on add-backs and owner pay, which the buyer controls after close

Revenue is the easiest to measure and the easiest to game. Buyers buy earnings, not revenue. A $3M revenue business with 10% EBITDA ($300K) is worth less than a $2M revenue business with 25% EBITDA ($500K). If the earnout pays on revenue, the buyer can pay out on a business that is worth less than what they bought.

SDE feels fair, since price is often set as a multiple of it. But SDE depends on add-backs and on what the owner pays themselves. After close the buyer sets the salary, the overhead and the allocations, and the seller cannot see them. If you want the background, read SDE vs EBITDA for ecommerce. Depending on owner compensation, the gap between SDE and EBITDA is typically 20-40%.

Gross profit is usually the cleanest middle ground. But it only works if "gross profit" is defined line by line.

Why the definition matters more in a marketplace business

On a standalone store, the number mostly moves with demand and ad spend. On Amazon, more things move it that neither side fully controls:

• Amazon fees. Referral and fulfillment fees change, and Amazon publishes its current structure on its seller pricing page. A fee change in the middle of the earnout period moves gross profit with no change in how the brand runs.
• Ad spend. Ad spend is a choice. Cut it and profit after ads rises for a while, then sales fade. Raise it and the number drops while the brand grows.
• Account health. A suppression or a restricted listing can take a top SKU offline for weeks. Who bears that loss?
• Returns, refunds and reimbursements. These post late. Which month do they count in?

For each of these, write the answer down. Which fees count. Whether ad spend sits above or below the line. How returns are timed. Which report is the source of truth. Name the report, not the concept.

Earnout length and cap

Keep the period short. My view is 12 months maximum, not 24. A longer earnout turns the seller into a passenger. Every month that passes, the result depends more on what the buyer decides and less on anything the seller did.

On the cap, there are two questions. What is the maximum total payout? And is it all-or-nothing at a single target, or does it scale? A single cliff invites games in the final month. A scaled payment between a floor and a ceiling is harder to game, but it needs a clear formula. Whichever you choose, write the formula into the agreement with a worked example using real figures, so nobody argues later about how it applies.

Who controls ad spend and pricing

This is the clause sellers skip, and it matters more than the target.

If the earnout pays on gross profit, whoever sets ad spend and pricing sets the payout. The buyer owns the business after closing and has every right to run it. But the earnout creates a conflict of interest, because now the buyer has a reason to lower the number.

You do not solve that with trust. You solve it with covenants in the agreement:

• A floor and ceiling on ad spend as a share of sales, or a rule that the buyer runs advertising consistent with the prior 12 months.
• No price changes beyond an agreed band without the seller's consent.
• No pulling or merging of top listings, and no switching fulfillment method, without agreement.
• Monthly reporting from the named source, delivered to the seller on a fixed date.
• Report access for the seller or the seller's accountant.

Buyers will push back on some of these. That is fine. Compromise on the band, not on the principle. If the buyer will not agree to any operating rules, that tells you how the earnout will be run.

What happens if the buyer changes the business

Suppose the buyer folds your brand into a bigger one, moves the hero SKU into a bundle, sells the business, or shuts a channel. What happens to the earnout?

Decide in advance, and put it in writing. Common protections are an acceleration clause (the remaining amount becomes payable if the buyer sells or materially changes the business), a covenant not to act in bad faith to reduce the payout, and a rule for measuring the target if the business is merged. The wording is a job for your lawyer. My job is to tell you to ask the question before closing, because after closing you have no leverage.

The buyer's side: using it to keep the founder

If you are the buyer, there is a second use. If you need the founder, the structure has to keep them. The question I ask before any structure: do we need this founder in year three? If yes, a 12-month earnout is a 12-month lease on them. Tie the deferred money to them staying. If they leave, it goes away. That is not a trick. It prices the risk you actually carry.

For sellers, the flip side is that a deal can pay you for staying, and you should know that before you agree to it. The first 90 days after buying a business shows what the handover looks like from the buyer's chair.

Earnout vs seller note vs holdback

These three get mixed up, so here is the difference.

Structure	What it is	Who carries the risk
Earnout	Contingent payment tied to a post-close target	Seller, on results they no longer control
Seller note	Fixed debt the buyer owes the seller, paid over time	Shared, with an offset clause protecting the buyer
Holdback	Part of the price held back at close to cover specific issues	Limited to the issue it covers, then released

A seller note is a promise to pay a set amount. It does not depend on a performance target. It can include an offset clause, which lets the buyer reduce payments if something the seller represented turns out to be false. I covered the tradeoffs in seller note vs SBA loan.

A holdback is closer to insurance. A portion of the price is held back for a defined period to cover specific risks, such as an inventory count or an issue found later. It is released if the issue does not show up. It does not pay on growth.

An earnout is the only one of the three that pays on performance. That is why it is the easiest to dispute. If you can get the same value as cash or as a seller note, take that first. Use an earnout only when the seller can genuinely influence the result.

Structure also interacts with whether you buy assets or stock. See asset purchase vs stock purchase, and ask your CPA how the treatment of an earnout differs between the two. I do not state tax rules here, because they depend on your facts.

A pre-signing checklist

Red flag	What good looks like	Risk
Metric is revenue with no cost lines	Use gross profit with every cost line defined in writing	High
No named source report	Name the report and the date it is delivered	High
Buyer controls ad spend with no limits	Set a band on ad spend and pricing	High
Earnout longer than 12 months	Shorten it, or move the value to cash or a note	Medium
No rule for a sale or merger of the business	Add acceleration and a good-faith covenant	High
Seller has no access to the books	Give the seller or their accountant report access	Medium

Run your diligence before you accept any structure. My due diligence checklist covers the numbers a buyer should verify and a seller should expect to be asked for. If you are selling, the broader playbook is in how to sell your Amazon FBA business. If you are choosing between a broker and an advisor to negotiate this for you, read business broker vs M&A advisor. The whole process, start to finish, is in my guide to how to acquire an ecommerce business.

The decision rule

Ask one question: can the seller influence the number?

If yes, an earnout can be fair. Price it on gross profit with a written definition, keep it to 12 months, cap it, and put operating covenants in the agreement.

If no, take the cash, or take a seller note with an offset clause.

Do not take the headline price on faith. Ask what is paid at close, what is contingent, and what the buyer is allowed to do while your money is on the line.

If you are selling and want to see how a buyer will structure an offer, start at sell your business. If you are buying and want a second read on a structure, see how I evaluate deals on the deals page. I also write about deal structure in the newsletter.

Frequently asked questions