Imagine this: you’ve just received an offer for your insurance agency. The headline number looks incredible—a multiple you never thought possible. But as you scan the details, you realize a large portion of that price is tied to something called an ‘earnout.’ What does that really mean for your payout?
Earnouts are one of the most common—and most misunderstood—parts of acquisition deals. They can help align buyers and sellers after closing, but they also come with risks and assumptions that every seller should understand. Let’s break down how earnouts work, what to watch for, and how to set yourself up for success.
What Are Earnouts?
An earnout is a portion of the purchase price that is paid later, based on the future performance of your business. Buyers often present an offer that looks like a high multiple of EBITDA, but much of that valuation may rely on future growth targets. In other words, you only receive that ‘headline number’ if your business continues to grow after the deal closes.
Why Buyers Use Earnouts
Buyers aren’t trying to shortchange you. In fact, they want to pay you the earnout—because that means the business they acquired has grown significantly. If you receive an extra $1 million in earnout payments, it likely means the buyer gained far more in enterprise value. Earnouts create alignment: both sides win if the business grows.
The Challenges for Sellers
The challenge is that these growth assumptions are often aggressive—sometimes double or triple what you’ve achieved in the past. While buyers may bring resources, technology, and carrier access, those tools only help if they’re put into motion quickly after closing. Many sellers, already exhausted from running their agency and navigating the transaction process, find it difficult to hit the ground running post-closing.
Understanding Hurdle Rates
Another critical factor is the hurdle rate. This is the minimum performance threshold your agency must hit before any earnout payments begin. For example, if your hurdle is 10% annual growth and you only achieve 7%, you may receive nothing—even if your business grew.
Pro Tips for Sellers
- Don’t rely on the earnout to make the deal work. If you need it to hit your number, it may not be the right deal.
- Understand the assumptions—ask whether targets are realistic given market conditions.
- Plan your leadership transition carefully. If you’re burned out, can your team drive growth post-closing?
- Negotiate clarity: define metrics, reporting standards, and dispute processes in writing
The Bottom Line
Earnouts can be a valuable way to bridge the gap between a buyer’s expectations and a seller’s achievements, but they are not guaranteed money. Approach them with clear eyes, realistic expectations, and a plan to hit post-closing growth targets. And most importantly, make sure the guaranteed portion of your deal makes sense on its own.
Thinking about selling your insurance agency? Our team helps decode deal structures and ensures you understand the true value of your offer before you sign. Contact INS Capital to get started with a valuation.
