Earnout Structures in Business Sales: How They Help Australian Founders Increase Total Sale Value

Richard
October 20, 2026

A Sydney SaaS founder received two offers for their $1.5M ARR business.

Offer A: $7.5M, all cash at completion (5x ARR).

Offer B: $9M total—$6.3M cash at completion plus a $2.7M earnout payable over 12 months (6x ARR).

The founder took Offer B. Twelve months later, they received the full $2.7M earnout. Total proceeds: $9M—20% more than the all-cash offer.

Now consider an Adelaide SaaS founder who accepted $2.4M at completion plus a $1.6M earnout over 18 months. The earnout was tied to EBITDA, and the buyer controlled the business. The buyer ramped up marketing spend, cut prices, and EBITDA came in under target. The buyer refused to pay. After 14 months of arbitration, the founder settled for $640,000—40% of what they’d been promised.

Same mechanism. Completely different outcomes.

Earnouts are one of the most powerful—and most misunderstood—tools in an online business sale. Structured well, they bridge valuation gaps and help Australian founders achieve higher total sale prices. Structured badly, they mean working for a year or more after the sale and receiving little or nothing.

This guide explains how earnouts work, when they make sense, the terms that separate good earnouts from bad ones, and how to negotiate them as an Australian founder selling to international buyers.

What Is an Earnout?
How Common Are Earnouts in Australian Online Business Sales?
Why Buyers Propose Earnouts
Anatomy of an Earnout: The Key Terms
Good Earnout Terms vs Bad Earnout Terms
Case Studies: What Went Right and What Went Wrong
Revenue-Based vs Profit-Based Earnouts
Protecting Yourself During the Earnout Period
Earnouts and Cross-Border Deals
Tax Treatment of Earnouts in Australia
When to Accept an Earnout (and When to Walk Away)
Negotiation Tips for Australian Founders
Next Steps
Conclusion

What Is an Earnout?

An earnout is a portion of the purchase price that’s paid after completion, contingent on the business hitting agreed performance targets over a defined period.

A simple example:

Total purchase price: $5M
Paid at completion: $4M (80%)
Earnout: $1M (20%), payable if the business achieves $2.2M ARR within 12 months of completion

If the target is met, you receive the $1M. If it isn’t—depending on how the earnout is structured—you might receive part of it, or nothing.

What an Earnout Is Not

Not deferred consideration — a fixed amount paid later regardless of performance (that’s a deferred payment or vendor finance)
Not escrow — a portion of the price held back to cover warranty claims
Not a consulting fee — payment for your time during transition

Many deals combine several of these. It’s important to understand which part of your price is guaranteed, which is held back, and which is genuinely at risk.

How Common Are Earnouts in Australian Online Business Sales?

Around 25% of Australian online business sales to international buyers in 2026 include an earnout component. They become more common as deal size and uncertainty increase:

Deal Profile	Earnout Frequency
All Australian online business sales	~25%
Valuations $2M+	30-40%
SaaS businesses	35-40%
High-growth businesses (buyer wants trajectory to continue)	Common
Founder-dependent businesses	Common
Small, stable content or eCommerce (<$1M)	Less common

Typical earnout size: 10-30% of total consideration for most online business deals. Earnouts above 40% of the price shift so much risk to the seller that they should be treated with real caution.

Why Buyers Propose Earnouts

Understanding the buyer’s motivation tells you what to negotiate.

1. Bridging a Valuation Gap

You believe the business is worth 6x ARR because of its growth trajectory. The buyer believes it’s worth 5x based on trailing numbers. An earnout lets both sides be “right”: the buyer pays 5x upfront and the extra 1x if your projections prove true.

2. De-Risking Uncertainty

Buyers use earnouts to protect against specific risks:

Recent growth spike — is it sustainable?
Customer concentration — will the big customer stay? (See our guide to customer concentration risk.)
Founder dependency — will the business perform without you?
New product or channel — will it deliver as forecast?

3. Keeping the Founder Engaged

If the business relies on your relationships or knowledge, an earnout keeps you motivated through transition.

4. Reducing Upfront Capital

For some buyers (individuals, search funds), an earnout reduces how much cash they need at completion.

The negotiation insight: If you can address the buyer’s underlying concern another way—a longer customer contract, documented processes, a strong second-in-charge—you can often reduce or eliminate the earnout.

Anatomy of an Earnout: The Key Terms

Every earnout is defined by six variables. Each one is negotiable.

1. The Metric

What is being measured? Revenue, ARR, gross profit, EBITDA, customer retention, a product milestone?

2. The Target

What level must be reached? Is it realistic based on current trajectory?

3. The Period

How long is the measurement window? 6 months? 12? 24?

4. The Payout Mechanism

Binary (cliff): Hit the target, get 100%. Miss by $1, get 0%.
Proportional (sliding scale): Achieve 90% of target, receive 90% of earnout.
Tiered: Different payments at different thresholds.
Capped or uncapped: Is there upside if you exceed the target?

5. Measurement and Verification

Who calculates the result, using what accounting policies, from what data source? Can you audit it? What happens if you disagree?

6. Payment Terms

When is the earnout paid after the measurement period ends? Is the money held in escrow or dependent on the buyer’s future solvency?

Good Earnout Terms vs Bad Earnout Terms

Term	Seller-Friendly ✅	Seller-Unfriendly ❌
Metric	Revenue or ARR (objective, hard to manipulate)	EBITDA or net profit (buyer controls costs)
Payout	Proportional, sliding scale	Binary all-or-nothing
Period	12 months or less	24+ months
Control	Seller retains operational influence	Buyer controls everything
Measurement	Independent data source (e.g. Stripe), audit rights	Buyer’s internal accounting, no audit rights
Definitions	Precise, with worked examples in the agreement	Vague (“as reasonably determined by the buyer”)
Payment	Within 30 days of period end; funds in escrow	Unclear timing; unsecured
Acceleration	Full payout if buyer sells the business or terminates you without cause	No protection

The difference between good and bad terms on a $1.5M earnout can easily exceed $1M.

Case Studies: What Went Right and What Went Wrong

Case Study 1: Sydney SaaS — Earnout Delivered 20% More

Business: $1.5M ARR B2B SaaS, growing strongly

Offers:

A: $7.5M all cash (5x ARR)
B: $9M total — $6.3M cash + $2.7M earnout over 12 months (6x ARR)

Earnout terms:

Revenue-based (ARR target)
12-month period
Proportional payout
Founder stayed on as product lead with genuine influence over roadmap and customer success
ARR verified from billing platform data

Outcome: Target exceeded. Full $2.7M received.

Total proceeds: $9M vs $7.5M — an extra $1.5M for 12 months of work the founder wanted to do anyway.

Case Study 2: Adelaide SaaS — Earnout Disaster

Deal structure:

$2.4M cash at completion (60%)
$1.6M earnout (40%)
Total potential: $4M

Earnout terms (red flags):

🚩 18-month period
🚩 EBITDA target of $400,000
🚩 Buyer controlled all operations
🚩 Buyer’s internal accounting determined the result
🚩 40% of price at risk

What happened:

Buyer dramatically increased marketing spend
Buyer cut prices to accelerate customer acquisition
Revenue grew—but EBITDA fell to $280,000
Buyer claimed the target wasn’t met and refused to pay

Outcome: The founder initiated arbitration. After 14 months, the matter settled for $640,000—40% of the earnout. After legal costs, stress and time, the founder estimates they lost more than $1M against the original deal value.

The lesson: The buyer may not have acted in bad faith—growth investment is a reasonable strategy. But a profit-based earnout combined with buyer control meant the buyer’s strategy and the founder’s payout were in direct conflict.

Case Study 3: Perth SaaS — A Well-Structured Earnout

Earnout: $1.8M maximum over 12 months

Terms:

✅ Revenue-based target
✅ Proportional payout (achieve 94% of target, receive 94%)
✅ 12 months
✅ Seller stayed as CEO with operational control during the period
✅ Quarterly Stripe data audits (independent verification)

Outcome: The business achieved 94% of target. The founder received $1.69M of $1.8M. No disputes. Both parties satisfied.

The lesson: Even falling slightly short, the proportional structure protected the founder. Under a binary structure, 94% would have meant $0.

Revenue-Based vs Profit-Based Earnouts

This is the single most important decision in earnout negotiation.

Why Revenue-Based Earnouts Protect Sellers

Objective: Revenue is recorded by third-party systems (Stripe, Shopify, App Store)
Hard to manipulate: The buyer can’t easily reduce revenue through accounting choices
Aligned incentives: Both parties want revenue to grow

Why Profit-Based Earnouts Are Risky

After completion, the buyer controls:

Marketing spend
Hiring decisions
Pricing
Shared service charges and management fees
Accounting policies and cost allocations

Every one of these affects EBITDA. A buyer pursuing perfectly legitimate growth strategies can push EBITDA below target—and some buyers will allocate group costs to the acquired business in ways that make targets harder to hit.

If the Buyer Insists on a Profit Metric

Sometimes a profit-based earnout is unavoidable—for example, if the business has a history of growing revenue at the expense of margin. If so, negotiate:

Gross profit rather than EBITDA (fewer buyer-controlled costs)
Fixed cost assumptions (e.g. marketing capped at historical % of revenue for earnout calculation)
Exclusion of group charges (no management fees, integration costs or head office allocations)
Pro forma calculation using the accounting policies in your pre-sale financials
Worked examples in the agreement showing exactly how the number is calculated

Protecting Yourself During the Earnout Period

Even with good headline terms, the detail in the sale agreement determines whether you get paid. Negotiate these protections with your M&A lawyer.

Operational Covenants

Commitments from the buyer not to undermine the earnout:

Maintain the business as a separate unit (or track its results separately)
Not materially change pricing, products or sales channels without consent
Provide reasonable resources (staff, marketing budget) consistent with the business plan
Not divert customers or opportunities to other group businesses

Information and Audit Rights

Monthly or quarterly reporting against the earnout metric
Read-only access to billing and accounting systems
The right to have an independent accountant review the calculation
Expert determination (an independent accountant decides) rather than litigation for calculation disputes

Acceleration Clauses

The full earnout becomes payable immediately if:

The buyer sells the business or a controlling interest
The buyer terminates your role without cause
The buyer breaches its operational covenants
The buyer becomes insolvent

Security for Payment

Earnout funds held in escrow (ideally)
Parent company guarantee (if the buyer is a special purpose vehicle)
Restrictions on set-off (the buyer shouldn’t be able to withhold earnout payments for unrelated warranty claims without due process)

Your Role and Authority

If you’re staying on to deliver the earnout, document your role, authority and decision rights. An earnout that depends on your performance is unfair if you have no ability to influence the outcome.

Earnouts and Cross-Border Deals

Australian founders selling to US or European buyers face extra considerations.

Currency

Is the earnout denominated in USD or AUD? A USD earnout carries exchange rate risk for 12+ months. A $1M USD earnout could be worth meaningfully more or less in AUD by the time it’s paid. Consider whether the target itself is measured in USD (and how AUD revenue is converted).

Governing Law and Disputes

Most international buyers will want their home jurisdiction’s law. If a dispute arises, litigating in Delaware from Melbourne is expensive and slow. Negotiate:

Expert determination for calculation disputes
International arbitration (e.g. Singapore or a neutral seat) for broader disputes
Clear, fast dispute timelines

Time Zones and Reporting

Agree the reporting cadence and format upfront. Monthly reporting in a pre-agreed template avoids months of back-and-forth across time zones.

Buyer Credibility

Due diligence works both ways. Before accepting a significant earnout from an international buyer, find out:

Their track record of paying earnouts on previous acquisitions
Whether you can speak to founders they’ve acquired from
The financial strength of the entity actually signing the agreement

This is one of the areas where an experienced broker adds significant value—we know which buyers honour earnouts and which don’t.

Tax Treatment of Earnouts in Australia

Earnouts raise specific capital gains tax questions, and the answers depend on how the deal is structured.

In general terms:

Australia has “look-through” earnout rules for qualifying earnout arrangements connected with the sale of a business or its active assets. Where they apply, earnout payments are broadly treated as additional (or reduced) capital proceeds for the original sale when received, rather than as a separate asset.
Conditions apply—including that payments are contingent on the business’s economic performance, are made within a limited period after the year of sale, and are part of an arm’s length deal.
Earnout timing can interact with small business CGT concessions and with which income year a gain falls into.
An earnout that is really payment for your services (e.g. tied to you remaining employed) may be treated as ordinary income rather than capital proceeds.

The practical message: The tax outcome of an earnout depends heavily on drafting. Have an M&A tax adviser review the earnout clauses before you sign the LOI—not after. We cover broader exit tax planning in our upcoming guide to tax optimisation for Australian business exits.

When to Accept an Earnout (and When to Walk Away)

Accept an Earnout When:

1. The terms are seller-friendly

Revenue-based, proportional payout
12 months or less
You retain meaningful control
Objective, independent measurement

2. You’re confident in the trajectory

The business is growing on solid fundamentals
The target is achievable based on current momentum
You can genuinely influence the outcome

3. It unlocks a materially higher price

The total value is significantly higher than the best all-cash offer
The guaranteed portion is still an acceptable outcome on its own

4. You’re willing to stay

You’re comfortable working 12-14 more months in the business
Your life circumstances allow it
You’re happy working for (or alongside) the new owner

5. The buyer is reputable

Track record of paying earnouts
Professional operation
Transparent during negotiation

Walk Away (or Push Back) When:

1. The terms are unfair

Profit-based with buyer control of costs
Binary all-or-nothing payout
24+ month period
Subjective or vague measurement

2. You want a clean exit

You’re ready to move on now
Another opportunity is waiting
You don’t want ongoing involvement

3. The business faces headwinds

Competitive or market pressure makes targets unlikely
Key customer or channel risk you can’t control

4. The extra value is minimal

Only $200,000 more for 18 months of work isn’t worth it for most founders

5. The buyer raises red flags

History of disputed earnouts
Vague answers during negotiation
Reluctance to agree audit rights or covenants

Two Founders, Two Right Answers

Sydney founder, aged 56, ready to retire:

All-cash offer: $5.2M
Earnout offer: $6M total over 24 months (profit-based, buyer control)
Analysis: Only $800K more, over two years, under unfavourable terms
Decision: Took the $5.2M cash and retired immediately. No regrets.

Melbourne founder, aged 42, loves the business:

All-cash offer: $8.5M
Earnout offer: $11M total over 12 months (revenue-based, proportional)
Analysis: $2.5M more for a year the founder wanted to work anyway, on fair terms
Decision: Accepted the earnout. Received the full amount. No regrets.

There’s no universally right answer. The right answer depends on your priorities, the terms on the table and the buyer you’re dealing with.

Negotiation Tips for Australian Founders

Reduce the need for an earnout first. Address the buyer’s underlying concern (concentration, founder dependency, trajectory) with evidence, contracts and documentation.
Negotiate the guaranteed portion hard. Treat the cash at completion as your real price; treat the earnout as upside.
Insist on proportional payouts. Binary structures are where most earnout value is lost.
Keep it short. Every extra month adds risk and delays your exit.
Define everything. Metrics, accounting policies, data sources and worked examples belong in the agreement, not in emails.
Secure the payment. Escrow, guarantees and acceleration clauses matter as much as the target.
Get advice early. Your lawyer and tax adviser should see earnout terms at LOI stage, when you still have leverage.
Create competition. The best protection against unfair earnout terms is another offer. Multiple competing buyers—something we create through our Website Closers partnership—shift the balance of power to you.

Next Steps

Earnouts can add substantial value to your exit, or they can become the most stressful part of it. The difference is almost entirely in the structure.

Get an Expert View on Your Offer

If you’ve received an offer that includes an earnout—or you’re preparing for a sale where one is likely—we can help you:

Assess whether the earnout terms are fair and achievable
Model the risk-adjusted value against all-cash alternatives
Identify the protections you should negotiate
Connect you with M&A lawyers and tax advisers experienced in cross-border earnouts

Get Free Valuation → | Book Consultation → | Call +61 3 8256 7507

Conclusion

Earnouts aren’t good or bad. Their structure is.

Key takeaways:

Around 25% of Australian online business sales include earnouts—more for SaaS and $2M+ deals
Revenue-based beats profit-based — buyers control costs, not your customers’ invoices
Proportional beats binary — 94% of target should mean 94% of the payout
Shorter is safer — 12 months or less wherever possible
Control and verification matter — audit rights, covenants and independent data sources
Secure the money — escrow, guarantees and acceleration clauses
Cross-border adds complexity — currency, governing law and buyer credibility
Get tax advice before the LOI — drafting determines the tax outcome

Structured properly, an earnout can turn a good exit into a great one. Structured poorly, it turns a sale into a dispute. Know the difference before you sign.

About Digital Asset Brokers

Digital Asset Brokers is Australia’s specialist in selling online businesses to international buyers. Based in Melbourne, we help Australian SaaS, eCommerce and content founders negotiate deal structures—including earnouts—that protect their interests, with access to 40,000+ qualified international buyers through our exclusive partnership with Website Closers (USA).

Disclaimer: Digital Asset Brokers is a business brokerage. We are not lawyers, accountants, registered tax agents or licensed financial advisers, and nothing in this article is legal, tax, accounting, financial or investment advice. The content reflects our general opinions and experience, is provided for general information only, and may not be accurate, complete or current for your circumstances. Figures, case studies and examples are illustrative, with details generalised or changed, and past outcomes are no guarantee of future results. Before acting on anything in this article, obtain independent advice from a qualified professional who understands your situation. To the extent permitted by law, Digital Asset Brokers and its related entities accept no liability for any loss arising from reliance on this content.

Author: Digital Asset Brokers Team · Location: Melbourne, Australia · Reading Time: 20 minutes · Category: Deal Structure, Earnouts, Australian Business Exit

Digital Asset Brokers