--- title: "Why Most Earnouts Never Pay Out" description: "Alex Lubyansky's view on why earnout provisions blow up: hidden obstacles, moving goalposts, and the attainability test most sellers skip." canonical: "https://acquisitionstars.com/perspectives/why-earnouts-blow-up" author: "Alex Lubyansky" firm: "Acquisition Stars" practice: "M&A and securities law" office: "Novi, Michigan (serves clients nationwide)" contact: "consult@acquisitionstars.com | 248-266-2790" --- # Why Most Earnouts Never Pay Out Perspectives Alex Lubyansky, Managing Partner, Acquisition Stars • September 3, 2026 Alex's Position Alex Lubyansky's view: most earnout provisions are not written in bad faith, but plenty are structured with enough hidden obstacles and moving goalposts that the seller never collects on them. Before agreeing to an earnout, the real question is not the headline number. It is whether the target is realistically attainable, what the actual pathway to get there looks like, and what the number is worth after tax once every contingency has played out. Alex Lubyansky has negotiated earnout provisions on both sides of small and middle market transactions, and his view is blunt: on paper, an earnout is one of the more elegant tools in M&A. It lets a buyer defer risk on a business whose future performance nobody can fully underwrite yet, and it lets a seller argue for a higher headline price by betting on their own trajectory. In his experience, that elegance evaporates more often than it should. > "One of the ways you see this come to life is earnout provisions. Some of them, hearts are in the right place, and there's an actual opportunity to reach those. But often they're structured in such a nuanced way, and it's such a minefield of hidden obstacles and moving goalposts, that you'll never see a dime of those earnouts." That distinction, good-faith structure versus a minefield dressed up as a deal term, is the entire thesis of Alex's view on earnouts. The mechanism itself is not the problem. The incentives built into the mechanism are. ## Why the Incentives Work Against the Seller Once the purchase agreement closes, the buyer controls the levers that determine whether the earnout target gets hit: how the acquired business is run day to day, which costs get allocated against it, whether it gets folded into a larger platform or kept standalone, how aggressively it gets invested in during the earnout period. The seller is on the outside looking in, frequently with limited contractual visibility into the internal decisions that will decide whether they get paid at all. Alex sees the negotiation gap most clearly in how redlines actually move. There is a difference between real negotiation and manufactured friction, and earnouts belong squarely on the legitimate side of that line. > "In a good transaction, the redlining focuses on risk allocation, earnouts, exclusivity. The structural points that matter to the client on either side." Earnout mechanics belong on that list, alongside risk allocation and exclusivity, precisely because they genuinely determine who bears the risk of the business underperforming after closing. That is real negotiation. What Alex is describing as the failure mode is something different: an earnout engineered from the start to look generous on the term sheet and to be practically uncollectible afterward. ## The Question Alex Tells Sellers to Ask First Rather than starting with the headline earnout number, Alex's advice is to start somewhere else entirely. > "That's something to look out for: realistically, is this attainable? And if so, what's the pathway to get there?" That sounds obvious stated plainly. In practice, it means pressure testing the metric itself, whether it is revenue, EBITDA, or a specific operational milestone, against who actually controls the inputs to that metric after closing. A revenue target the seller no longer has any authority to drive, inside a business the buyer now runs, is not a real opportunity. It is a number designed to look good in the term sheet and nothing more. ## The Number That Sounds Good Is Rarely the Number You Keep Alex's second consistent point is one sellers tend to underweight: tax structure matters as much as the earnout figure itself. > "You're not looking for the headline number that's going to generate good press. You're looking for the right structure, the right deal." A seller who agrees to an earnout without understanding how those payments will actually be taxed, and under what deal structure, can watch a large share of the number they negotiated for disappear before it ever reaches them. This is where Alex's skepticism about earnouts as a marketing device comes through most directly. > "Those don't last very long in actual life terms. It's just a cool story for a moment in time, not the reality that you deal with afterward." An earnout designed to generate a press-friendly total purchase price, rather than a genuinely collectible one, is optimized for the wrong outcome from the start. ## If You Are the Buyer None of this means buyers should avoid earnouts. A well-structured earnout remains one of the more useful tools for bridging a genuine valuation gap, particularly when the seller believes in the business's near-term trajectory more than the buyer does. The practical takeaway from Alex's view is that a buyer who structures an earnout as a real bridging mechanism, with a metric the seller retains meaningful influence over and a transparent pathway to the target, gets the benefit of the tool without inheriting the credibility problems that come from structuring it as a negotiating tactic. A buyer who structures the earnout to be functionally uncollectible is not saving money. They are creating a seller who feels misled after closing, with everything that follows from that: disputes, reputational cost in a deal community that is smaller than it looks, and litigation risk sitting exactly on the clauses that were supposed to prevent it. ## If You Are the Seller Alex's advice to sellers is not to reject every earnout on principle. It is to treat the attainability test as a precondition, not a formality. Before signing anything, ask who controls the metric after closing, ask what happens if the buyer integrates the business into a larger platform mid-earnout, and get real clarity on the tax treatment of the payments before comparing the earnout figure to a straight cash offer. A smaller all-cash number that is fully attainable is often worth more in practice than a larger earnout that depends on goodwill from a counterparty who no longer has much incentive to extend it. ## Where the Standard Guide Differs This page is Alex's own view on why earnouts fail as often as they do. For the drafting mechanics themselves, the specific contract clauses that reduce dispute risk, including metric definition, operating covenants, anti-offset provisions, and payment security, are covered in the firm's [earnout agreements explained](https://acquisitionstars.com/blog/earnout-agreements-explained) guide. ### Structuring or Reviewing an Earnout? Tell us about the transaction and the earnout terms on the table. We review every submission and respond within one business day. ## Frequently Asked Questions ### Are earnouts always structured in bad faith? No. Alex Lubyansky's view is that some earnouts are structured with a real, attainable opportunity for the seller to reach the target. The problem is the ones structured with so much nuance and so many hidden obstacles and moving goalposts that the seller never sees the payment, whether or not that was the buyer's intent going in. ### What is the single most important question to ask before agreeing to an earnout? Alex Lubyansky's framing: realistically, is this attainable, and if so, what is the actual pathway to get there. That question matters more than the headline percentage or dollar figure, because a target the seller no longer controls after closing is not a real opportunity. ### Does the earnout percentage matter more than how it is taxed? Not according to Alex Lubyansky. His view is that tax structure is massively important. A seller who compares only the headline earnout number to a straight cash offer, without pricing in how the earnout payments will actually be taxed under the deal structure, can end up keeping far less than the number on the term sheet implied. ### Should a seller ever agree to an earnout? Alex Lubyansky's advice is not to reject every earnout on principle, but to treat the attainability test as a precondition rather than a formality. Ask who controls the metric after closing, ask what happens if the buyer integrates the business mid-earnout, and get clarity on tax treatment before comparing the figure to an all-cash alternative. ### Earnout Agreements Explained The structure, risks, and negotiation mechanics of earnout provisions. ### Business Acquisitions Legal representation for buyers and sellers, from LOI through closing. ### Perspectives All of Alex Lubyansky's recorded views on deals, structure, and process. --- Source: https://acquisitionstars.com/perspectives/why-earnouts-blow-up Markdown version generated for machine readers. Canonical HTML at the source URL.