What is an earnout in a healthcare M&A deal?
An earnout is a contingent purchase price payment that becomes due only when the acquired business meets specific performance targets after closing.
Quick answer
An earnout is a portion of the purchase price paid only if the practice hits post-closing financial targets, typically 5 to 20 percent of total consideration over 12 to 36 months, tied to retained EBITDA or revenue thresholds.
The detail
Earnouts show up in healthcare deals for two reasons: the buyer wants the seller to stay engaged through the transition, or the buyer and seller disagree on the growth story and the earnout lets them split the risk. A typical earnout pays 5 to 20 percent of total consideration over 12 to 36 months, tied to EBITDA or revenue thresholds. The mechanics that matter: what counts as EBITDA (is it before or after the buyer's corporate allocations), who controls operations during the earnout period, what happens if the buyer changes strategy, and is there a cure period or a catch-up if one year misses and the next year overperforms. Earnouts are the single most common source of post-closing disputes in healthcare M&A. Sellers who accept an earnout without locking down the operating rules usually end up in arbitration.
About 25 to 40 percent of healthcare practice sales include an earnout component, more common in deals with revenue growth stories or recent physician additions.
Source: Pitchbook Healthcare Services
Earnout disputes account for a large share of post-closing litigation in middle-market healthcare M&A, per ABA Business Law Section reports.
Source: ABA Business Law Section
What this means for clinic owners
From Sorso
If a buyer needs an earnout to get to the price you want, assume the earnout will pay out at 50 to 70 percent of the stated target, not 100. Negotiate the structure so the floor (cash at close) is a number you would accept without the earnout ever paying a dollar.
Related questions
How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal.
What is rollover equity in a practice sale?
Rollover equity is the portion of sale proceeds that the selling owner retains as equity in the buyer's platform, typically 15 to 30 percent of total consideration, creating a second liquidity event when the platform is later sold.
What is a working capital peg in an M&A deal?
A working capital peg is the target level of net working capital the buyer expects at close; delivery above or below the peg results in a dollar-for-dollar purchase price adjustment, typically reducing a headline price by 3 to 8 percent at close.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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