Educational content only. This explains, in general terms, how earnouts are structured in practice-sale transactions. It describes broad market patterns and is not legal, tax, financial, or transaction advice. Earnout terms are heavily negotiated and vary by deal, specialty, province, and state. Consult qualified legal, tax, and transaction advisors before agreeing to any earnout.
When a consolidator or private-equity-backed buyer quotes a practice owner a total deal value, that number is usually not what the seller takes home, and the difference is rarely about anything dishonest. It is about structure. A meaningful portion of the headline is typically deferred, and the largest deferred piece is usually the earnout: money the seller can collect after closing only if the practice hits defined performance targets. Understanding how an earnout is built, and where the money is most often lost, is the difference between reading a deal on its headline and reading it on what a seller is realistically likely to receive.
This post goes deep on the earnout mechanism specifically. For how it fits into the wider deal, see our overview of how healthcare consolidation works and, for dentistry, how a DSO offer is structured.
What an Earnout Is, and How It Differs From a Holdback
An earnout is purchase price the seller earns after closing, contingent on the business meeting specific performance targets. It is the buyer's way of paying for results rather than projections. If the practice performs, the seller collects. If it does not, the seller collects less or nothing. An earnout pays the seller for the future.
A holdback is a different mechanism that is easy to confuse with an earnout. A holdback is a portion of the agreed price withheld at closing and held in escrow for a defined period, typically as security against problems that surface later, such as undisclosed liabilities or a breach of the seller's representations. A holdback protects the buyer from the past. If no valid claims arise, the seller receives it at the end of the escrow period. According to widely cited deal-terms data, market-norm holdbacks tend to run in the range of 10 to 15 percent of the purchase price for roughly 12 to 18 months, held to cover indemnification claims.
The distinction matters because the two carry different odds. A holdback is usually collected in full, because most deals do not generate indemnification claims. An earnout is genuinely contingent, and whether a seller collects it depends on performance and, just as importantly, on the contract terms that govern how performance is measured and who controls the practice while it is being measured.
What the Typical Earnout Looks Like
Earnouts have become a common feature of mid-market healthcare transactions, used to bridge the gap between what a seller believes the practice is worth and what a buyer will commit to before seeing results. A few patterns hold across the market.
Size. The earnout is often a substantial slice of the deal, not a rounding error. Industry deal-terms research has put the median earnout at roughly 31 percent of the closing payment in recent non-life-sciences transactions. In other words, close to a third of the value can sit on the contingent side of the line.
Period. The performance window is usually measured in years, not months. The median earnout period runs around 24 months, with most falling between one and three years. A longer window means more time over which conditions outside the seller's control can move the result.
Metric. Most earnouts are tied to a financial target, with revenue or EBITDA the most common. Roughly half to four-fifths of earnouts use EBITDA or revenue as the main metric. The choice matters to a seller: a revenue target is harder for a buyer to influence through cost decisions, while an EBITDA target can be affected by how the buyer runs and charges the practice after closing.
Where the Earnout Is Actually Lost
The defining feature of an earnout is that the seller is responsible for results during a period when the buyer increasingly controls operations. That gap, between who carries the risk and who holds the controls, is where most earnout disappointment originates. It is usually not the result of bad faith. It is the result of ordinary post-closing decisions that happen to move the metric the seller is being measured against.
The buyer changes how the practice runs. After closing, the buyer may integrate the practice into a larger platform, change the fee schedule, shift staffing, alter the payer mix, reallocate patients, or load shared corporate costs onto the practice. Any of these can move EBITDA, and a seller measured on EBITDA can miss a target even while the underlying practice is healthy. This is the single most common way an earnout underperforms: the seller hits the clinical and operational marks but the reported number moves for reasons tied to how the new owner runs the business.
The contract does not require the buyer to protect the metric. This is the part most sellers do not check, and it is where the documents matter most. Deal-terms research indicates that only a minority of earnouts, on the order of about 17 percent, obligate the buyer to operate the business consistent with past practice or to act so as to maximize the earnout. In the majority of deals, the buyer has no contractual duty to run the practice in the way that would let the seller hit the target. Absent that protection, the seller is betting on outcomes they no longer control and the buyer is not required to preserve.
Set-off rights let the buyer net other claims against the earnout. A majority of earnouts, more than 58 percent by one widely cited study, include an indemnity set-off right, meaning the buyer can reduce earnout payments by the amount of any indemnification claim it asserts. A seller counting on the full earnout can find it reduced by claims that arise from the holdback side of the deal entirely.
Measurement disputes. EBITDA is not a single defined number. It depends on which add-backs are accepted, how shared costs are allocated, and which accounting choices apply. When the metric is loosely defined in the agreement, the calculation becomes a point of friction precisely when money turns on it. This is why deal lawyers stress defining the metric exactly, including sample calculations, and naming an independent accountant to resolve disputes without litigation.
What Reduces the Risk
None of this makes an earnout a bad outcome. It makes the terms of the earnout, rather than its headline size, the thing that determines its value. The protections that experienced sellers and their advisors tend to focus on are consistent and worth knowing before any deal reaches the term-sheet stage.
A clearly defined metric, with the calculation method and sample numbers written into the agreement, removes most measurement ambiguity. Contractual constraints on the buyer's ability to change how the practice operates during the earnout period protect the seller from controllable swings in the number. An independent-accountant mechanism gives a path to resolve a dispute without a lawsuit. A revenue-based metric, where it can be negotiated, is generally harder for a buyer to influence than a profit-based one. And a realistic, evidence-based target, set against the practice's actual recent performance rather than an optimistic projection, is more likely to be reached. The common thread is simple. The earnout's worth lives in its terms, and those terms are negotiated before signing, not discovered after.
How to Weigh an Earnout in an Offer
For an owner comparing a structured offer against a simpler one, the practical step is to treat the earnout as what it is: contingent consideration, not guaranteed money. A defensible way to read an offer is to weight the guaranteed cash at closing fully, and to weight the earnout and any other deferred consideration by a realistic, risk-adjusted estimate of what is likely to be collected, given the targets, the period, and the contractual protections. An earnout with a tightly defined metric, operational protections, and a realistic target is worth far more than one of the same headline size with a loose metric, no operating constraints, and an ambitious target. The two can carry identical numbers on the cover page and very different value in practice.
Read this way, an earnout stops being a single number and becomes a probability-weighted one. That is the same discipline a lender applies to any projected cash flow, and it is the difference between evaluating an offer on what it promises and evaluating it on what it is likely to deliver.
Weighing an earnout means understanding the normalized earnings it is measured against. The Practice Valuation Reference shows how a multiple is applied to normalized EBITDA, and the Profitability Calculator models the operating profit the practice produces, which is the base any earnout target is set against. Both free, with separate Canadian and US models, no account required.
Disclaimer: This content is general and educational and varies by deal, specialty, province, and state. Earnout terms and the market figures cited reflect general patterns from published deal-terms research and change over time. This content is not legal, tax, financial, or transaction advice, recommends no specific decision or party, and does not constitute brokerage or advisory services. Consult qualified legal, tax, and transaction professionals before evaluating any offer.