What is the earn-out really worth?
A headline price with a large earn-out is not the same as cash at close. Enter the upfront payment and the earn-out terms, and see the probability-weighted value, its present value, and the multiple you are actually paying.
Payments are assumed at the end of the year shown and discounted from closing at 15%.
- 25% of the headline price is contingent, a common range for lower mid-market earn-outs.
- Expected payout is only 49% of the maximum. The seller is likely valuing the headline, so the two sides are further apart than the price suggests.
From headline to risk-adjusted price
What the probability of missing targets and the wait for payment take off the headline.
Payment schedule by year
| Year | Maximum | Expected | Discount factor | Present value |
|---|---|---|---|---|
| Year 1 | $3M | $2.1M | 0.870 | $1.83M |
| Year 2 | $4M | $2M | 0.756 | $1.51M |
| Year 3 | $5M | $1.75M | 0.658 | $1.15M |
| Total | $12M | $5.85M | $4.49M |
Acquifolio monitors the measured results behind each milestone so payments and disputes are backed by the record.
Assumes each payment falls at the end of its year at the amount shown (no partial or catch-up payments), and ignores tax, escrow and set-off rights. Not investment, tax or legal advice. Everything runs in your browser and nothing you enter is stored or sent.
How it works
Milestones: each payment's expected value is maximum payout × probability.
Tiered on one metric: each scenario pays the amount of the highest tier its outcome reaches. expected payout = Σ probability × payout, with probabilities scaled to 100%.
Present value: expected payout ÷ (1 + discount rate)^year, assuming payment at the end of the year.
headline price = upfront + maximum earn-outrisk-adjusted price = upfront + present value of expected earn-out- Effective multiples divide each price by base EBITDA. Contingent share is maximum earn-out ÷ headline.
Questions
How do you value an earn-out?+
Estimate the probability of hitting each target, multiply each maximum payment by that probability, and discount the result back to closing at a rate that reflects the risk of the business and the seller's unsecured position. Formal fair value measurements for accounting often use Monte Carlo simulation; for negotiation, a probability-weighted, discounted estimate is usually enough.
What discount rate should I use for an earn-out?+
Earn-out payments depend on the business performing and on the buyer paying, so they are riskier than senior debt. Buyers commonly use a rate between their cost of debt and their target equity return, often 12–25% for lower mid-market deals. Sellers implicitly use a lower rate, which is one reason the two sides value the same earn-out differently.
How large should an earn-out be relative to the price?+
Earn-outs of 10–30% of headline consideration are common. Above roughly 30%, sellers tend to resist strongly, and the definitions of the metric, accounting policies and the buyer's operating covenants become the main negotiation.
Why does the earn-out period matter?+
Longer periods delay payment, which lowers present value, and make the metric harder to measure as the business is integrated, reorganized or changes accounting policies. Most earn-outs run one to three years; longer periods carry a higher risk of disputes.
From headline enterprise value to the cash the seller actually receives: net debt, debt-like items, NWC true-up.
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Open toolAcquifolio connects sourcing, diligence evidence, the investment committee, the portfolio and your LPs, so every number keeps its source.