Earnout Structures in Agency Sales: How to Not Get Burned
Earnouts can add 30-40% to your sale price or leave you working for free. Here is how to structure them right.
If you're selling your agency to a PE-backed buyer — and increasingly to larger independent acquirers — the word "earnout" will appear in the offer letter. It can be the best part of the deal or the worst. The difference is in the structure.
How Earnouts Work
An earnout defers a portion of the purchase price and ties it to the agency's post-close performance. Typical structure: 60 to 70 percent of the total price at close, with 30 to 40 percent paid over two to three years based on hitting defined targets.
If you're selling for $2 million with a 70/30 earnout, you get $1.4 million at close and up to $600,000 over the next two to three years — if the targets are met. If they're not, that $600,000 evaporates, and your actual sale price was $1.4 million.
Retention-Based Earnouts
The most common and fairest earnout structure is retention-based. If the book retains at 92 percent or higher, you get full earnout. Below 92, the payment decreases proportionally. Below 85, you might get nothing.
Retention earnouts work because retention is measurable, both parties understand it, and the seller can influence it through a smooth transition. They also protect the buyer against the book shrinking after closing, which is a legitimate risk.
The danger with retention earnouts is the definition. Retention calculated by policy count is different from retention by premium volume. If the buyer raises rates aggressively post-close and some clients non-renew, was that your retention failure or their pricing decision? Define the measurement method explicitly in the purchase agreement.
Growth-Based Earnouts
Growth earnouts tie payments to the agency hitting revenue or premium growth targets post-close. These are riskier for sellers because growth depends on factors increasingly outside your control after you've sold — marketing investment, carrier appetite, staff hiring, and strategic decisions the buyer makes.
If you're staying on to run the agency during the earnout period and you have authority over growth-related decisions, a growth earnout can be lucrative. If you're in an advisory role with limited authority while the buyer makes the real decisions, a growth earnout is a trap.
Protecting Yourself
Structure matters more than headline number. Insist on clear, objective, measurable targets. Quarterly measurement periods with documented reporting. An independent dispute resolution mechanism. Protection against the buyer sabotaging performance through rate increases, staffing changes, or resource withdrawal.
The strongest protection is a retention floor: below a certain retention percentage, the earnout adjusts, but above it, the payment is guaranteed regardless of other factors. This limits your downside while keeping the buyer's interest in retention aligned with yours.
Also negotiate what happens if the buyer resells the agency during your earnout period. If a PE firm buys your agency and then sells the platform eighteen months later, does your earnout transfer? Does it accelerate? Get this in writing.
The Walk-Away Calculation
Before you accept an earnout structure, do the walk-away math. If you get zero earnout — everything goes wrong post-close — is the cash-at-close amount acceptable? If $1.4 million at close would make you happy even if you never see the additional $600,000, the deal works. If you need the full $2 million to make the economics worthwhile, you're banking on performance targets in a business you no longer control.
The best mindset for earnouts: the cash at close is the real price. The earnout is a bonus if things go well. If you can live with that framework, the earnout structure is fine. If you can't, negotiate for more cash at close and less earnout, even if the headline number is lower.
A guaranteed $1.6 million is worth more than a potential $2 million that depends on someone else's decisions for the next three years.