Earn-Outs in Food Business Sales: How to Avoid Leaving Money on the Table
An earn-out is a deferred payment mechanism in a business sale where a portion of the purchase price is held back and paid only if the business achieves specified performance targets after completion. They are common in food and beverage transactions. They are almost always more favourable to the buyer than to the seller.
Understanding why earn-outs happen, how they are structured, and what drives the size of the deferred element is one of the most commercially important things a UK food founder can do before entering a sale process.
Why Earn-Outs Are Proposed
Buyers propose earn-outs for one reason: they are not willing to pay at completion for value they have not yet verified. The specific triggers for earn-out proposals in food business transactions include:
Customer concentration - where the concentrated customer relationship has not survived the transition to the new owner in previous acquisitions by this buyer
Founder dependency - where the business's commercial performance is judged to be contingent on the founder's continued presence and relationships
Growth projections - where the seller's financial model projects growth above the historical trend and the buyer is not willing to pay upfront for that growth
Undocumented customer or supplier relationships - where the contractual basis of key commercial relationships cannot be verified in due diligence
Recent EBITDA improvements - where the improvements are recent enough that the buyer cannot be confident they are structural rather than cyclical
In 2025 and 2026, earn-outs in UK food business transactions typically defer 30 to 50 percent of the purchase price, with earn-out periods of one to three years. For a business valued at £8m, this means £2.4m to £4m of consideration that is at risk of never being received.
How Earn-Outs Are Structured
The most common structure in UK food business transactions is an EBITDA-based earn-out: the seller receives the deferred payment if the business achieves a specified EBITDA in the one to two years following completion. Revenue-based earn-outs are less common but appear in businesses where EBITDA is volatile or where the buyer is primarily concerned about top-line stability.
The targets set in earn-outs are almost always achievable on a standalone basis but become harder to achieve under new ownership. The buyer may change suppliers, adjust the product mix, implement cost-cutting programmes, or restructure the management team in ways that affect EBITDA but are entirely within their rights as new owner. Earn-out disputes - where the seller believes the buyer's management of the business has prevented the earn-out targets from being met - are one of the most contentious areas of business sale litigation.
The Earn-Out Trap
The earn-out trap is the scenario where a founder accepts a headline price that seems acceptable - perhaps £9m versus an expectation of £10m - without fully internalising that £3.5m of that £9m is deferred and conditional. The effective price received at completion is £5.5m. Whether the full £9m is received depends on factors that will increasingly be outside the founder's control once the business transfers to the new owner.
Founders who have not negotiated business sales before often underestimate how much control shifts at completion. The earn-out period is almost always the most uncomfortable period of the relationship between buyer and seller, because the seller is typically contractually obligated to remain in the business, the business is no longer theirs, and the targets they need to hit are being affected by decisions they no longer make.
What Reduces Earn-Out Risk Before Going to Market
The earn-out is almost always a response to a specific risk the buyer has identified. Addressing that risk before the process reduces the buyer's justification for the earn-out provision.
Customer concentration above 25 percent is the most reliable predictor of earn-out proposals. Reducing it to below 15 percent over the 24 months before a process is the most effective single action to reduce earn-out risk. Documented, signed customer contracts with notice provisions replace informal relationship-based arrangements and remove the buyer's ability to argue that the concentrated revenue is contingent on the founder.
Founder dependency is the second trigger. A management team that has demonstrably run the business for 12 to 18 months with reduced founder involvement - evidenced in board minutes, management accounts, and documented decision-making processes - gives a buyer the confidence that the commercial performance will survive the transition.
Historical EBITDA stability reduces the buyer's desire to use an earn-out to protect against growth projections. A business with five years of stable EBITDA growth is a fundamentally different underwriting proposition to one with two years of recent improvement.
Negotiating Earn-Out Mechanics
When an earn-out is unavoidable, the mechanics matter as much as the size. Sellers should focus on:
Definition of EBITDA - ensuring the earn-out EBITDA is calculated consistently with the pre-completion definition and that the buyer cannot restructure costs in ways that suppress the earn-out EBITDA
Operational covenants - restrictions on the buyer's ability to make material changes to the business during the earn-out period that would affect the earn-out performance
Acceleration clauses - provisions that trigger full earn-out payment if the buyer changes the nature of the business, makes redundancies above a specified threshold, or takes other actions that fundamentally alter the earn-out environment
Dispute resolution mechanisms - pre-agreed processes for resolving earn-out calculation disputes without recourse to litigation
Frequently Asked Questions
Can I refuse an earn-out proposal?
Yes, but refusing requires either walking away from the transaction or generating sufficient competitive tension from other buyers that the proposing buyer moderates the earn-out requirement. This is why a competitive process with multiple bidders is almost always more favourable to the seller than a bilateral negotiation with a single buyer.
What is a reasonable earn-out percentage?
There is no universal standard. In the current UK market, earn-outs below 20 percent of enterprise value are generally considered manageable. Above 40 percent, the earn-out risk begins to fundamentally alter the economics of the transaction from the seller's perspective.
How are earn-out disputes typically resolved?
Most sale and purchase agreements include an expert determination process for earn-out disputes, with a nominated accountancy firm acting as independent expert. Litigation is available as a backstop but is rarely the first or preferred route due to cost and time.
Is an earn-out better than a price reduction?
This depends on your confidence in the business's ability to meet the targets under new ownership. If you are highly confident - and if the earn-out mechanics are tightly drawn - an earn-out that maintains the headline price while deferring some consideration is preferable to a straight price reduction. If you have any doubt about the buyer's management of the earn-out period, a lower headline price with full cash at completion is often the better economic outcome.
Can I negotiate to keep running the business during the earn-out?
Typically yes, but the degree of operational control during the earn-out period varies by transaction. Buyers generally want operational integration to begin at completion. The negotiation is about the scope and pace of integration rather than whether it happens.
