Earnout
Also known as: Contingent Consideration · Performance Payment
An earnout is a portion of the purchase price paid to the seller after closing, contingent on the business hitting specified retention, revenue, or EBITDA targets — typically 10–30% of the total price across 1–3 years.
What is earnout?
Earnouts bridge the gap between what a seller thinks the agency is worth and what the buyer is willing to pay up-front. The seller takes lower cash at close in exchange for a chance at a larger total price if the book performs as promised post-close.
The most common agency earnout structures: retention-based (paid if X% of named accounts retain through year 2), revenue-based (paid if revenue stays within Y% of trailing-twelve-month at close), and EBITDA-based (paid if pro forma EBITDA hits a threshold). Retention earnouts are the most common in agency deals because they directly target what the buyer is most worried about.
Earnouts are also where deal disputes most often happen. The mechanics — what counts as 'retained,' what happens if the buyer cuts service to drive cost out, how new business is treated — get negotiated in detail in the definitive agreement.
Why it matters in agency valuation
An earnout can be friend or enemy. Friend: it lets you achieve a higher total price than the buyer would pay up-front. Enemy: a poorly-structured earnout puts a 20%+ chunk of your sale price at the buyer's discretion. Pay close attention to who controls the levers (servicing decisions, account treatment, M&A integration) during the earnout period.
Example
Common questions
How can I protect myself in an earnout structure?
Three guardrails: (1) define the metric precisely — 'retention' means premium-weighted retention of accounts in force at close, not net of new business; (2) lock in the buyer's obligation to maintain service levels and not actively cut accounts during the earnout period; (3) include audit rights so you can verify the earnout calculation.
Related terms
A letter of intent (LOI) is a non-binding outline of the major economic and structural terms of a proposed acquisition, signed before formal due diligence begins.
Retention rate is the percentage of accounts (or premium) that renew with the agency from one year to the next, with industry-typical retention for P&C agencies in the 85–90% range.
Book roll is the process by which an acquired book of business transfers from the seller's agency to the buyer's agency post-close, and book-roll probability estimates how much of the book actually retains through that transition.
A seller note is a portion of the purchase price the buyer owes the seller as a loan rather than cash at close, typically structured at 4–7% interest over 3–7 years.
Last reviewed: April 24, 2026
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