The Role of Earn-Outs in IT M&A: Structuring Win-Win Deals

When it comes to selling an IT services company, one aspect of the deal often makes founders nervous and buyers cautious: the earn-out.

For many small and mid-sized IT services mergers and acquisitions, particularly those in the $5 million to $50 million revenue range, earn-outs are not just optional; they serve as a crucial link between the price the seller believes the business is worth and the amount the buyer is willing to pay upfront.

However, if you’ve heard cautionary tales about earn-outs, such as targets being “unrealistic,” founders feeling disillusioned, or buyers overpaying due to unrealistic projections, you’re not alone. Earn-outs can be complicated. Yet, if structured properly, they can transform a potentially contentious negotiation into a mutually beneficial agreement.

What Is an Earn-Out—and Why Does It Matter?

An earn-out is an agreement in which a portion of the purchase price depends on the future performance of the business.

For example, consider a scenario where a buyer acquires a 60-person DevOps consultancy in Gurugram. The buyer pays $4 million upfront but agrees to pay an additional $1.5 million over the next 24 months, contingent on the company maintaining a 90% client retention rate and achieving projected revenue growth.

For buyers, earn-outs serve as a safety net. They want to avoid overpaying for growth that may not materialise. And for sellers, earn-outs provide an opportunity to prove their projections and be rewarded for their success.

Why Earn-Outs Are Especially Common in IT Services

Earn-outs show up in many industries, but they’re particularly prevalent in IT services for a few reasons:

• Founder-led client relationships: Buyers need reassurance that those relationships—and the revenue they bring—won’t walk out the door after the founder leaves.
• Project-based revenue models: Unlike SaaS companies with predictable recurring revenue, IT services firms often deal with fluctuating project pipelines. Earn-outs help hedge that volatility.
• Integration risk: A boutique IT firm’s culture, delivery model, and team morale can shift post-acquisition. Earn-outs encourage sellers to stay engaged and smooth that transition.

Why Earn-Outs Get a Bad Reputation

Talk to a founder who’s lived through a bad earn-out, and you’ll hear the same complaints:

• “The targets were unrealistic—they tied my payout to factors I couldn’t control.”
• “The buyer changed the rules after closing, and my earn-out became unreachable.”

On the flip side, buyers have their frustrations:

• “The founder checked out once the ink dried, and growth stalled.”

These misalignments lead to disputes, distrust, and in extreme cases, litigation. Infosys’ acquisition of Noah Consulting (2015) reportedly faced tension when earn-out targets clashed with integration changes—a classic example of how these structures can become battlegrounds.

The lesson? Earn-outs aren’t inherently bad—they’re just too often structured poorly.

How to Structure an Earn-Out That Works for Both Sides

• Keep the metrics simple
  Use no more than one or two KPIs—typically revenue or EBITDA in IT services. Complex earn-outs with multiple metrics often lead to conflict.
• Set a reasonable timeframe
  Most IT earn-outs span 12 to 36 months. Anything longer can feel restrictive, while anything shorter may not give the business enough time to stabilise.
• Define “business as usual”
  Sellers worry buyers will alter pricing, sales strategy, or staffing to make targets harder to achieve. Buyers worry sellers will focus only on short-term wins. The solution is to put it in writing—clearly outline which operational decisions require joint sign-off during the earn-out period.
• Consider non-financial milestones
  Retention of key clients or entry into a new geography can be as important as revenue. Including these alongside financial targets keeps incentives balanced and realistic.
• Allow for partial payouts
  Avoid all-or-nothing earn-outs. A tiered structure—such as paying 80 per cent of the earn-out if 80 per cent of the target is met—keeps motivation high even if goals fall slightly short.
• Build in regular checkpoints
  Quarterly performance reviews during the earn-out period keep both parties aligned and prevent surprises that could damage trust.

Final Thought: Earn-Outs Shouldn’t Be a Trap

Earn-outs don’t have to be a “gotcha” clause in the purchase agreement. Done right, they can be a trust-building tool.

For sellers, they provide a way to unlock the value they’ve built without feeling like they’re working for free.

For buyers, they offer a way to de-risk the acquisition without demotivating the very person who built the business.

Earn-outs can make or break deals. When they’re structured thoughtfully—with clear KPIs, fair timelines, and transparency—they turn a transaction into a true partnership.

Thinking about selling or buying an IT services company? Don’t let earn-outs scare you. Structure them the right way.