You’ve built your property business from the ground up. You’ve navigated the regulations, managed the tenants, and grown your portfolio. Now, you’re at the exit table. The buyer offers you a price that meets your expectations, but there’s a catch: a significant portion of that money is tied to an earn-out.
An earn-out is a deal structure where a portion of the purchase price is paid after completion, contingent on the business hitting specific financial targets. On paper, it’s a great way to bridge the valuation gap. In reality, it is one of the most contentious parts of any merger or acquisition deal.
If you want to protect your final payout as a seller, you need to understand why these structures often crumble and how to bulletproof your Sale and Purchase Agreement (SPA).
To protect yourself, you must first understand how the landscape changes once you hand over the keys. Most earn-out disputes aren’t born from malice, but from a shift in operational control. Here are the three primary reasons they fail:
Once the buyer takes over, they often integrate your business into their existing infrastructure. They might change the software, merge the maintenance teams, or centralize the back office. While this makes sense for the buyer, it makes it incredibly difficult to track the standalone performance of your original business. If the data gets muddy, your earn-out calculation will follow suit. This is why many owners prefer a Share Purchase over an asset sale, as it can sometimes keep the entity’s history cleaner.
Your goal during the earn-out period is to maximize short-term profit to hit your targets. The buyer’s goal, however, might be long-term market share. If the buyer decides to invest heavily in a new tech stack or aggressive marketing in the first year, those expenses could slash the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that your payout is based on.
In many property management acquisitions, the secret ingredient is the founder’s relationship with the landlords. If the buyer changes the way tenants are vetted or how repairs are handled, client retention could dip. The buyer sees this as a learning curve, but to you, it’s a direct threat to your payout.
You cannot leave your final payout to chance. When negotiating your SPA, you must insist on these protections to ensure the buyer doesn’t inadvertently (or intentionally) move the goalposts.
EBITDA is easy to manipulate through accounting “adjustments” and shared overhead costs. Whenever possible, try to tie your earn-out to Gross Revenue or Managed Unit Count. These are top-line metrics that are much harder for a buyer to dilute with post-acquisition expenses.
This is your most important shield. This clause requires the buyer to operate the business in a manner consistent with how you run it. It should explicitly prevent the buyer from:
Ensuring your business remains compliant with RICS Professional Standards during this transition is also vital to maintaining the consistent manner of operation.
What happens if the buyer sells the business again six months after buying it from you? Or what if they fire the management team you left in place? You must include an Acceleration Clause stating that if certain trigger events occur (like a change of control or a breach of the conduct covenant), the full earn-out becomes due and payable immediately. This is particularly important when considering the tax implications of your exit, such as Business Asset Disposal Relief, where the timing of payments can matter.
An earn-out shouldn’t be a gamble, but a roadmap to your full valuation. By understanding your buyer’s motivations and tightening the legal language in your SPA, you can transition out of your business with the peace of mind that your hard-earned legacy will result in a full financial reward.
Are you not sure how to structure an exit from your business? Let’s talk.