How to Structure Earn-Outs Without Regret

Earn-outs can bridge the gap between buyer and seller — or create tension that lingers long after the deal. Here’s how to structure them for alignment, not frustration.

Introduction

In many dental practice sales — particularly those involving corporate groups or private equity — the final sale price isn’t paid all at once. Instead, a portion is deferred, conditional on the future performance of the business. This is known as an earn-out.

Earn-outs can be a valuable tool. They allow sellers to realise value based on the ongoing success of the business, while giving buyers confidence they’re not overpaying. But they’re also a source of tension, and when poorly structured, they can lead to disappointment, misaligned incentives, or post-sale friction.

At Handon, we’ve worked with both sides of the table. Here’s what you need to know to structure earn-outs that are fair, clear, and regret-free.

1. Start With Clarity — What Is the Earn-Out For?

Before structuring the mechanics, clarify the purpose.

• Is the earn-out rewarding the seller’s continued involvement post-sale?

• Is it incentivising a specific performance target — like patient retention or revenue growth?

• Or is it simply bridging a valuation gap where both parties see potential, but can’t agree on a fixed number?

Understanding the role the earn-out plays will help ensure it’s structured in a way that makes sense — and avoids misaligned expectations down the track.

2. Keep the Metrics Objective and Measurable

The most common earn-out structures are based on:

• Revenue (gross billings or collections)

• EBITDA (earnings before interest, tax, depreciation, amortisation)

• Patient retention or activity metrics

Whichever metric is chosen, it must be:

• Clearly defined (e.g. “calendar-year gross collections, excluding lab fees”)

• Easy to measure (preferably through the practice’s existing PMS and accounting software)

• Within the seller’s influence, if post-sale involvement is expected

Vague or overly complex structures — like those based on ‘integration success’ or subjective assessments — are a recipe for frustration.

3. Align Timelines With Reality

A typical earn-out period ranges from 6 to 24 months. For dental practices, 12 months is common, giving a full view of seasonal trends and allowing enough time for continuity of care and patient retention to stabilise.

Longer earn-outs can be effective in larger, multi-site transactions — but for most single-practice sales, anything beyond 18 months may increase risk for the seller without added benefit.

The timeline should also align with the seller’s ongoing role. If they’re stepping back after 6 months, tying earn-out payments to 24-month performance creates tension and uneven control.

4. Be Realistic About Post-Sale Influence

One of the biggest pitfalls in earn-out structuring is overestimating the seller’s control post-sale. In group acquisitions or PE-backed networks, the seller may no longer have direct control over operations, staffing, or pricing — all of which affect performance.

If the seller’s role is part-time, or if the buyer is planning significant changes, tying the earn-out to financial outcomes introduces unnecessary conflict.

A well-designed earn-out should match what the seller can reasonably influence, and buyers should commit to preserving conditions that support success — at least through the earn-out period.

5. Document Everything — and Discuss It Openly

Earn-outs often fall apart not because of disagreement on intent, but because of lack of clarity in documentation. It’s critical to:

• Define terms (e.g. “net profit” can mean different things)

• Clarify reporting expectations and access to data

• Outline how disputes will be resolved

• Agree on timing and structure of payments

Open, early dialogue — ideally facilitated by advisors who understand both the commercial and interpersonal dynamics — can help both sides align before legal documentation begins.

6. Don’t Let the Tail Wag the Dog

Finally, don’t let the earn-out become the centrepiece of the deal. It’s a mechanism — not the outcome. Sellers should assess the upfront value independently and be comfortable with the base price. Earn-outs can enhance value, but if they become too large a portion of the total, the risk-reward equation can become skewed.

In most cases, a well-structured earn-out should feel like a bonus for alignment — not a gamble on post-sale performance.

Earn Trust, Not Just Dollars

At their best, earn-outs reward ongoing success and create trust between buyer and seller. At their worst, they generate tension, miscommunication, and misaligned expectations.

The key is structure — and experience. With the right guidance, an earn-out can be a smart part of a broader transition strategy, not a source of regret.