Earnouts When Selling a Business: How DFW Owners Lose Six Figures on the Back End

A Dallas roofing owner I worked with last year had a $6.8M deal on paper. The number that hit his bank account two years later was $4.4M. The difference wasn't a fraud or a fight — it was a poorly written earnout.

That gap is normal. It is also avoidable.

Earnouts are the most misunderstood piece of a sub-$20M business sale. They look like more money on the term sheet. They behave like a different kind of deal entirely. Below: how earnouts actually work when selling a business, the math DFW owners consistently get wrong, and the eight LOI terms that decide whether the back-end ever shows up.

What Is an Earnout When Selling a Business?

An earnout is a piece of your purchase price that gets paid only if the business hits agreed targets after closing. The buyer pays you a known amount at close. Then, over the next one to three years, you collect more money — if revenue, EBITDA, gross profit, customer retention, or a similar metric clears a defined hurdle.

It is structured as a contingent payment, not a loan. There is no interest, no fixed amortization, no personal guarantee from the buyer. There is just a metric and a math formula. Hit the metric, get paid. Miss it, don't.

Earnouts show up most often in three situations:

• The buyer and seller disagree on valuation, often by 15 to 30 percent. Rather than walk, they bridge the gap with a contingent payment that gives the seller a path to the higher number.
• The business has lumpy or uncertain revenue. A recent contract spike, a single large customer, or a new product line that hasn't proven out yet.
• The seller is critical to the next 12 to 24 months. Sales relationships, technical knowledge, key vendor accounts. The buyer wants you motivated after closing, not just paid and gone.

How Earnouts Actually Pay Out: The Real Math

On a $1M to $20M DFW exit, earnouts typically run 10 to 30 percent of the headline price. The rest splits between closing cash (usually 60 to 80 percent), seller financing (0 to 15 percent), and rollover equity (0 to 20 percent if a PE buyer is involved).

Here is the part nobody puts on the term sheet. Across hundreds of lower middle market deals studied by SRS Acquiom, Bloomberg, and our own files at Kingdom Broker, only about 50 to 65 percent of earnout dollars actually get paid in full. Roughly one in four pay nothing. Another quarter pay a partial.

So when a buyer slides a term sheet across the table with a $5M closing payment plus a $2M earnout, the honest expected value is closer to $5M + ($2M × 55%) = $6.1M, not $7M. That 90 cents of risk-adjusted dollars per promised dollar is what serious sellers price into the negotiation.

Where DFW Sellers Quietly Lose the Back End

After watching dozens of these in HVAC, plumbing, roofing, manufacturing, and dental, the same patterns show up. Here are the six biggest leaks.

1. Picking the wrong metric

EBITDA-based earnouts are the riskiest for sellers because the buyer controls dozens of line items that flow through EBITDA after closing. Corporate cost allocation, management fees, new hires, marketing spend, accounting policy changes — all legally fair, all destructive to the metric. Revenue and gross profit are cleaner because they are harder to manipulate. Customer retention or contract renewal counts are cleaner still.

2. No protection against buyer-driven integration changes

The buyer combines your DFW business with their existing operations the week after closing. Your revenue gets booked under their entity. Your costs absorb their overhead. Your sales team gets reassigned. Suddenly the metric that defines your earnout is unrecognizable. Without a standalone accounting clause, you are paid based on a business that no longer exists.

3. Tying the earnout to employment

The IRS pays attention here. If your earnout is contingent on you continuing as an employee, the payments can be recharacterized as ordinary compensation income, not capital gains. That swings the tax bill by 17 percentage points or more — plus self-employment tax. Earnouts should be tied to business performance, not to your W-2 status.

4. No acceleration on a flip

Private equity buyers especially. They buy your business, then sell to a strategic 18 months later. Without an acceleration clause, your remaining earnout vanishes into the next deal. The new owner has no contractual obligation to pay your earnout. The old PE firm has zero incentive to honor it.

5. Aggressive targets the buyer set during a heated bid

Buyers in competitive processes often agree to high earnout targets to win the deal — knowing the targets are unlikely to be hit. Sellers who don't model the targets against their actual run-rate wind up signing a 4-year fantasy. Anchor every target to the trailing 12-month performance, not a forecast you both want to believe.

6. No dispute resolution mechanism

The buyer's accountants prepare the earnout calculation each year. You either trust their math or you sue. Without a defined independent accountant process, an earnout disagreement becomes a $200K legal fight over $300K of contingent money. Buyers know this. Many earnouts are short-paid because the seller can't afford to litigate.

The 8 LOI Terms That Protect Your Earnout When Selling a Business

By the time you are arguing over an earnout calculation 14 months after closing, the leverage is gone. The fight is in the LOI and the definitive agreement. Eight terms every DFW owner should put on the table before signing:

1. The metric is gross profit or revenue, not EBITDA. Or, if EBITDA, with a defined, non-adjustable cost structure for the earnout period.
2. Standalone accounting. The acquired business is operated and measured as a separate unit during the earnout period. No commingling, no shared overhead allocation, no accounting policy changes without seller consent.
3. Buyer covenants of good faith. The buyer agrees not to take action with the primary purpose of avoiding earnout payments — firing key salespeople, dropping product lines, redirecting customers, gutting marketing spend.
4. Acceleration on change of control. If the buyer sells the business, gets acquired, or files for bankruptcy, the unpaid earnout accelerates and becomes due immediately at the maximum amount.
5. Caps and floors on the math. A defined minimum earnout if performance is at least X percent of target. A defined maximum so the buyer can't argue the targets were unfair when you blow them out.
6. Mitigation rights. If the buyer makes a decision that materially harms the earnout metric, the seller has the right to either credit-back the lost revenue/EBITDA or trigger early payment.
7. Independent accountant dispute resolution. A defined process: 30 days to object, a named accounting firm or selection process, who pays for the review, and a binding decision rule.
8. Tax structuring as purchase price. Explicit language that the earnout is treated as additional purchase price under the installment method — not as compensation — and tied to business metrics independent of seller employment status.

Dense list. It is also the difference between collecting 70 percent of your promised earnout and 10 percent.

The DFW Texas Angle

Most DFW trade businesses — HVAC, plumbing, roofing, electrical, landscaping, dental — have two earnout-specific risk factors that owners in other markets don't share at the same intensity.

First, the DFW market is growing fast. Population growth, commercial expansion, and the Texas business climate make trailing 12 months a poor predictor of next year's revenue. Buyers know this and aggressively price growth assumptions into earnout targets. Owners often sign earnouts that require 15 to 20 percent annual growth just to clear — on top of what the trailing books already showed.

Second, founder relationships drive the revenue. The Dallas roofing customer didn't sign because of the company name. They signed because the founder showed up at the Frisco church mens group, the McKinney chamber, or the Plano referral network. Once the founder is gone, those relationships fade. A 24-month earnout tied to revenue from a business whose owner just left is a tax on the seller's reputation that the buyer never paid for.

The move for DFW owners is simple. Either keep the earnout under 12 months while you are still active, or shift the contingent dollars into seller financing or rollover equity where the math is clearer.

Pre-LOI Earnout Checklist

How an Earnout Fits the Rest of Your Deal Structure

Earnouts almost never travel alone. On a typical DFW $5M to $15M deal, the consideration breaks across four or five buckets:

• Cash at closing — the certain money, usually 60 to 80 percent of the headline.
• Seller note — the loan you give the buyer, with stated interest and payment terms. More predictable than an earnout, but still carries credit risk on the buyer.
• Rollover equity — if a PE buyer is involved. You retain 5 to 20 percent equity in the new entity. This is upside on the buyer's growth plan, not the business as it sits today.
• Earnout — the contingent piece tied to post-close performance.
• Working capital true-up — the closing-day adjustment that can swing the wire by six figures in either direction.

A clean deal stack — cash + small seller note + modest earnout — almost always pays the seller more in real risk-adjusted dollars than a deal padded with a giant earnout to make the headline look bigger.

The Truth Most Sellers Don't Hear Until It's Too Late

Buyers structure earnouts every day. They have a CFO, a deal lawyer, and an integration team who run these for a living. Most sellers see one earnout in their entire career. The asymmetry is enormous.

At Kingdom Broker, the earnout is one of four conversations we have before taking a DFW business to market — alongside owner dependency, customer concentration, and the working capital adjustment. Three of those are about valuation. The earnout is about whether the valuation you negotiated actually arrives. On a deal at $5M to $15M, the difference between a well-structured earnout and a sloppy one is routinely six figures. Sometimes seven.

Your business has a story. The earnout shouldn't write the ending for you.