Earn-Out
Capital Markets Financial Model (Free Excel Download)
Model earn-out targets, operating performance, contingent payments, purchase accounting, and seller proceeds to evaluate acquisition consideration and downside exposure.
professionals from Deloitte
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About this model
An earn-out model translates the negotiated earn-out structure of an M&A deal into a year-by-year schedule of contingent payments, then walks back to both buyer and seller views of the all-in economics. The workbook lives on a single Assumptions sheet that holds the cash close payment, an aggregate earn-out cap across the 4-year window, the seller discount rate, and the target LTM EBITDA at close (used for the EV/EBITDA multiples). The revenue earn-out structure is defined by 4 annual revenue targets, a revenue floor expressed as a % of target, a revenue share rate above the floor, and a per-year revenue earn-out cap. The EBITDA earn-out structure mirrors that with 4 annual EBITDA targets, an EBITDA floor as a % of target, an EBITDA share expressed as a multiple of excess, and a per-year EBITDA earn-out cap. The user also enters 4 years of projected revenue and EBITDA actuals (the actual post-close performance projection), 5 sensitivity bands each for revenue and EBITDA achievement, and two status thresholds.
The Performance sheet pulls targets and actuals together to compute achievement %, attainment band (below floor / floor to target / at or above target), and a blended achievement %. The Earn-Out Schedule then builds revenue earn-out (actual - floor × target → excess → × share → MIN with cap) and EBITDA earn-out (same structure with the multiple-of-excess share), sums to a pre-cap total per year, applies the aggregate cap (which rolls forward year by year), discounts each year's payout at the seller rate, and reconciles cumulative against the SUM of yearly payouts on a check row. The Deal Summary surfaces buyer (close + total earn-out = all-in, EV/EBITDA at close vs all-in) and seller (nominal, NPV of earn-out, NPV total proceeds, % contingent, PV discount) views. The 5x5 Sensitivity grid computes total earn-out NPV across joint revenue and EBITDA achievement bands.
The Dashboard reads cash close, total earn-out paid, all-in purchase price, NPV proceeds, % contingent, average revenue and EBITDA achievement, on-track / watch / heavy status flags for both metrics, years cap was hit, years revenue was below floor, and a per-year payout composition block with revenue earn-out, EBITDA earn-out, total paid, and PV with a panel total row. M&A advisors, corporate development teams, private equity sponsors, and founders selling a business use this template for sell-side negotiation (size what the structure is genuinely worth in NPV terms), buy-side underwriting (stress-test the target's plan against the earn-out targets), and structure design (iterate on floor, cap, and share to land a meaningful but bounded contingent consideration package).
What every model includes
Live formulas, no hardcoded values
Outputs are driven by live formulas, so the workbook updates from its assumptions instead of relying on hardcoded results.
All assumptions in one tab
Inputs are clearly marked in the Assumptions tab and separated from calculations, making it clear what to change and what to leave intact.
Statements always balancing
For integrated-statement models, the balance sheet, cash flow, and supporting schedules tie through properly.
Distinct schedules for clarity
Debt, working capital, taxes, and cash flow can get messy quickly. We group calculations in clear schedules, not across disconnected tabs.
No hidden macros or external links
There are no unexplained external workbook links or macros to undermine auditability or portability.
Changes flow through the model
Update a key driver and see the impact carry through the forecast, financing, and return outputs. We never use hardcoded numbers in formulas.
What's inside the Earn-Out
- Deal close terms: cash close payment, aggregate earn-out cap, seller discount rate, target LTM EBITDA at close
- Revenue and EBITDA earn-out structures with floor as % of target, share above floor, and per-year cap
- 4 years of projected revenue and EBITDA actuals you can flex on Assumptions
- Per-year earn-out schedule with cumulative paid, PV, and aggregate-cap roll-forward
- Buyer all-in cost (close + earn-out) and seller nominal + NPV proceeds with EV/EBITDA multiples
- 5x5 sensitivity grid of total earn-out NPV across joint revenue and EBITDA achievement
- Dashboard with KPIs, average attainment, on-track / watch / heavy status flags, and per-year payout composition
- Performance sheet with per-year achievement %, attainment band, blended achievement
Earn-Out Model: Structure, Payments, and Deal Impact
This earn-out model template helps deal teams size and stress-test contingent consideration for M&A transactions. It calculates per‑year payouts tied to revenue and EBITDA performance, applies caps, and produces buyer and seller perspectives.
Suitable for corp‑dev, banking, legal, and PE professionals evaluating a draft SPA or preparing an IC memo, the model offers structured analysis of earn-out mechanics.
Operating Drivers Behind Earn-Out Calculations
The model ties earn-out payments to two metrics: revenue and EBITDA. For each year, you set targets, floors (as a percentage of target), share rates, and per‑year caps.
- The share method, which is the primary payout, pays a percentage of revenue above the floor and a multiple of EBITDA above its floor. This multiple mirrors the enterprise‑value multiple at close.
- The tier method is displayed side‑by‑side as an alternative, using threshold and payout percentages for four tiers. These inputs on the Assumptions sheet drive all calculations, allowing you to test structures negotiated in a draft SPA.
Calculation Flow from Actuals to Payouts
Projected actuals for revenue and EBITDA are entered for Bull, Base, and Bear scenarios, and an active scenario toggle selects which set drives the payouts. The Earn‑Out Schedule computes per‑year payouts using the share method, capped at per‑year limits and then constrained by the aggregate cap.
- A running remaining cap ensures total payments never exceed the aggregate cap. Catch‑up provisions, if enabled, can unlock prior‑year shortfalls when cumulative actuals exceed cumulative targets.
- Discount factors convert nominal payouts to present values using either end‑of‑year or mid‑year convention, which slightly increases NPV.
Outputs for Deal Evaluation and Accounting
The model produces a range of outputs: per‑year payout builds, cumulative paid and present value, buyer and seller views, sources and uses, probability‑weighted expected NPV, ASC 805 fair‑value schedule with remeasurement, accretion/dilution percentage for buyer EPS, foregone interest, and tax treatment.
- A 5x5 sensitivity grid and a Y1‑only grid show how NPV varies with joint achievement, while a hit‑rate table provides one‑way sensitivity.
- The Dashboard summarizes 14 headline metrics, including attainment status flags, maximum payout, and aggregate cap exhaustion.
Practical Use in M&A Negotiations
This template is designed for a 30‑minute working session to size and stress‑test the contingent consideration block. It helps quantify the cost of giving ground on floors, share rates, or caps.
- The probability‑weighted expected NPV supports IC memos and fairness opinions. The sensitivity grids highlight the impact of first‑year performance, often the dominant failure mode.
- The model also surfaces accounting and tax consequences, such as P&L volatility from ASC 805 remeasurement and the risk of ordinary‑income treatment if earn‑out is tied to employment. It bridges the gap between buyer and seller expectations.
Formatted to IB standards
Named theme colors repaint the whole workbook in one click, on top of an investment-banking structure with clear input, output, and cross-sheet reference styling - brand-ready, institutional-grade, and fully auditable.
Created by ex-finance professionals
Hey, I’m Alex and I created Finamodel.
Over my years in the finance industry I kept building the same models over and over again. Same structure, same assumptions, different logo. So I started building frameworks to turn them into clean, reusable templates.
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I’m not an expert in every industry, but I’ve built enough models to know what belongs in one. And when something is completely foreign to me, I reach out to my network for experts to work on our models with us.
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Frequently asked
What is an earn-out and why is it used?+
An earn-out is a contingent payment in an M&A deal where the seller receives additional consideration after close based on the target achieving specified post-close performance metrics, typically revenue or EBITDA. Earn-outs bridge valuation gaps when buyer and seller disagree on the future trajectory of the business: the buyer pays a lower amount at close and tops up if the seller projections come true.
How is the revenue earn-out calculated?+
For each year, raw earn-out is MAX(0, revenue actual minus floor% times revenue target) times revenue share, then capped at the per-year revenue cap. The floor (e.g. 90% of target) creates a hurdle below which no payout occurs; the share (e.g. 50%) is the seller slice of revenue above the floor; the cap limits the maximum per-year payment.
How is the EBITDA earn-out different?+
Same structure, but the share above floor is expressed as a multiple of excess EBITDA (e.g. 3.5x) rather than a percentage. This reflects how earn-outs are usually negotiated in EBITDA-multiple-driven deals: every dollar of EBITDA over the floor is worth several dollars to the seller because that incremental EBITDA would have driven a higher headline price at close.
What does the aggregate cap do?+
The aggregate cap is the maximum total earn-out the buyer will pay across all 4 years combined. It rolls forward (remaining = prior remaining minus prior paid). Each year total payout is min(rev earn-out + EBITDA earn-out, remaining aggregate cap). Once exhausted, subsequent years pay zero regardless of performance.
Why is the seller NPV lower than the nominal proceeds?+
Earn-out payments are spread over 4 years, so the seller discounts them at their cost of capital (typical 10-15% for a private founder). The PV discount on the Deal Summary shows how much of the contingent value is lost to time and risk vs the nominal sum.
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