If there is one area where I see digital acquisition deals go sideways — not at closing, but in the months after — it is the earnout. Specifically, it is the earnout that both the buyer and the seller think they understand but that neither has actually defined with enough precision to survive the first dispute.
Earnouts and seller financing are presented, usually by brokers, as elegant tools that bridge the valuation gap. The seller wants a number the buyer is not willing to pay upfront. An earnout makes both parties feel like they got what they wanted. The problem is that earnouts are not agreements — they are promises written in language that almost always favors whoever has more leverage when performance is eventually measured.
What an Earnout Is and What It Is Not
An earnout is a contingent payment structure. The seller receives a portion of the purchase price only if the business hits defined performance milestones after the acquisition closes. In theory, this protects the buyer from overpaying for projected performance. In practice, it creates a second negotiation after the deal closes — one the buyer often loses.
Seller financing is different but often confused with earnouts. In seller financing, the seller extends credit directly to the buyer — the buyer pays a portion of the purchase price over time, usually with interest, regardless of performance. Seller financing does not protect a buyer from a bad deal. It just defers payment.
Many listings combine both. A seller will accept 60% at closing, offer 20% as seller financing over 24 months, and include a 20% earnout tied to revenue. That looks clean on a term sheet. It rarely stays clean in execution.
Where Earnouts Break Down
The failure modes are almost always definitional. What counts as “revenue” in the earnout period? Is it gross revenue or net? Does it include one-time consulting income the seller generated personally? What happens if you, as the new owner, pivot the monetization model and the old revenue metric becomes meaningless? Who controls the accounting?
In my experience reviewing digital acquisition deals, the earnout disputes I have seen fall into three categories. First, the metric was never properly defined — “revenue” was used when “net owner earnings” should have been the measure. Second, the buyer made operational changes that materially affected the metric the earnout was tied to, and the seller claimed interference. Third, the integration destroyed the traffic or revenue the seller had projected, and the buyer tried to use the earnout as a write-down mechanism rather than as a performance measurement.
None of these outcomes are rare. The FTC’s guidance on earnout structures in M&A transactions acknowledges that earnout disputes are one of the most litigated areas in business acquisition law — even in small deal contexts where litigation makes no economic sense.
The Seller Financing Illusion
Seller financing is attractive to buyers because it signals seller confidence. If the seller is willing to hold paper, the reasoning goes, they must believe the business will continue to perform. That reasoning is sometimes correct. It is also sometimes a seller’s best available option for getting a deal closed on a business they know has problems.
What most buyers do not scrutinize carefully enough is the recourse structure. If you fail to hit the seller note payments, what happens? Does the seller get the business back? Is there a UCC filing on the business assets that gives the seller first claim? In many standard seller note structures, the answer to both questions is yes — and buyers discover this only when they miss a payment.
What most guides will not tell you is this: seller financing is often a signal that the deal cannot clear a conventional acquisition threshold. If the business were clean enough for a third-party lender, the seller would not need to carry the note. That does not make seller-financed deals bad — but it means the buyer is absorbing risk that a real underwriter would have priced differently or rejected entirely. Run it through the same underwriting rigor you would use for any other deal structure.
How to Protect Yourself If You Use Either Structure
If you are going to include an earnout, treat it like a separate contract within the acquisition agreement. Define every term with obsessive precision. Name the exact metric. Specify the accounting method. Clarify who controls the books. Set a hard cap on the seller’s ability to claim interference if you make operational changes. And build in a dispute resolution mechanism that does not require litigation — an agreed-upon third-party accountant, for example.
If you are accepting seller financing, get an independent attorney to review the recourse provisions before you sign. Confirm whether there is a UCC-1 filing and what it covers. Negotiate the cure period — the window you have to make a late payment before the seller can exercise default remedies. A 30-day cure period is standard. Some seller note templates use 10 days. That difference matters enormously if your first operational quarter is rocky.
For earnouts tied to content sites specifically, I would add one more caution: never tie an earnout to a traffic metric alone. Traffic can be manipulated in the short term through promotional activity that the seller controls during a transition period. Revenue is a harder metric to game, but even revenue can be inflated temporarily through pricing actions that damage long-term customer value. Earnings — specifically trailing EBITDA or SDE on a rolling basis — is the only earnout metric I would accept for a content or SaaS acquisition.
The Real Purpose of Deal Structure
Deal structure exists to allocate risk. Every component of a purchase agreement is a negotiation about who bears which risks and under what conditions. Earnouts and seller financing are not favors — they are risk allocation tools that require the same rigor as everything else in the due diligence process.
If you are building a repeatable acquisition process, your LOI template should already have standard earnout language and seller note provisions ready to go. If it does not, that is a gap worth closing before your next deal. You can start with the letter of intent framework we use at KnightByrd — the earnout section alone has saved us from two deals that would have gone badly sideways.
The sellers who push hardest for earnouts are often the ones who understand their business well enough to know the trailing numbers will not hold. That is not a reason to walk away from every deal with an earnout component — but it is absolutely a reason to stress test the projections with the same rigor you would apply to SDE adjustments and add-back verification.
The earnout trap is real. The buyers who avoid it are not smarter — they are more precise.