How to structure creative agency earn outs
Earn-outs are one of the most discussed features of creative agency M&A, and one of the most misunderstood. Just this week I was listening to a podcast with two venture capital experts talking about M&A. "Never accept an earn-out," they both agreed. Well, that's that then isn't it. Or is it?
Why earn-outs aren't unusual in creative agency M&A
Earn-outs are one of the most discussed features of creative agency M&A and one of the most misunderstood. Just this week I was listening to a podcast with two venture capital experts talking about M&A. “Never accept an earn-out,” they both agreed. Well, that’s that then isn’t it. Or is it?
If you live in the world of software development, an all-up-front deal might be possible. If you’re selling fixed assets as part of your business sale, it might also be possible. But if your business is 100% people, no tangible assets, all intellectual assets that walk out of the door every day, your buyer will either:
1. Expect to offset buyer risk by deferring up to half of the consideration; or
2. If 100% up-front payment is the only option, reduce your agency EBITDA multiple instead.
Those are the only ways they can reduce their transaction risk, so the situation is kind of binary. If you want 100% up front, are you prepared to take (significantly) less? Thought not.
Which brings us back to earn-outs and their undeserved bad rep.
What is an earn-out?
An earn-out is simply a deferred consideration mechanism – a way of spreading the payment you receive for your agency (the consideration) over a few years. Part of the sale price is paid at completion, and the remainder is usually divided equally over two or three years. The part that is paid up front is called ‘the closing consideration’ and the part that’s spread over time is called ‘the deferment’. A deferment funded by you (i.e. you are owed the money contractually) is also often called ‘vendor finance’ in the USA.
Now, if the deferment is contingent on future performance – i.e. the amount paid can go up and down depending on how your agency performs - it becomes an earn-out.
In creative agency sales, that performance is typically linked to EBITDA, gross profit, or occasionally revenue.
Can you bank on receiving your earn-out? In full?
Among founders, earn-outs often carry a negative association. We’ve all heard stories about targets that moved, metrics that were reinterpreted, or deferred consideration that never quite materialised. Does this mean earn-outs are bad? Or just that most earn-outs are poorly conceived, badly papered and spun to suit the disgruntled ex-owner’s post-sale story?
Pretty much my earliest memory of agency M&A involved exactly this. The owner of an agency I worked for at the beginning of my career sold us into a larger group. We were told she had sold under a three-year earn-out, but within one year she was out; free. The received wisdom was that the terms of the earn-out were just insufferable for her. That her new bosses were horrible bosses. Anyone sane would have had to flee.
My experience of running earn-outs across numerous transactions is that the ones who don’t make it to the end often had no intention of doing so in the first place. As a buyer, I want all of my earn-out holders to do as well as possible. If they do, it means I bought an agency that’s thriving. I’ll discuss the economics of transactions from a buyer’s point of view in a future blog. For the time being, take it from me – most good buyers want their earn-out holders to thrive.
So, I don’t believe earn-outs are inherently problematic. Quite the opposite.
You will find that, in UK creative agency transactions, earn-outs are common. Moreover, they are often entirely appropriate and in most cases, even desirable. The issue is rarely the concept of the earn-out, it’s the construction. Work with a good advisory team (me plus a sh*t hot lawyer) and yes, you can expect to receive your earn-out in full.
Mindset shift. Creative agency earn-outs are about sharing risk
Buyers rely on earn-outs because agencies are unusual assets. They are people-led, relationship-driven, and frequently shaped by founder influence. A buyer is not just acquiring historic earnings; they are underwriting the sustainability of those earnings once ownership changes. An earn-out allows them to share that risk.
For founders, this can be highly beneficial. It can support a stronger overall valuation and allow participation in the upside if growth continues. Problems arise not because earn-outs exist, but because they are agreed without sufficient precision.
In private equity-backed agency acquisitions, EBITDA-linked earn-outs are most common. This mirrors the valuation methodology used at completion. On the surface, it feels straightforward. However, EBITDA is not a neutral number. It is shaped by accounting treatment, cost allocation, management charges, and integration decisions. If the definition of EBITDA is not tightly specified in the Share Purchase Agreement (SPA), ambiguity can undermine certainty.
Some transactions instead use gross profit as the earn-out metric. For creative agencies concerned about central cost allocation following acquisition, this can offer greater clarity. Gross profit is less exposed to group overhead decisions and can reduce post-completion friction.
Revenue-linked earn-outs are simpler still. Revenue is easier to measure and harder to reinterpret. Yet revenue without margin discipline introduces risk. Growth that erodes profitability ultimately damages enterprise value. For this reason, revenue-based earn-outs tend to work best where pricing power and client retention are robust.
EBITDA-based earn-outs are often the most effective, simplest to operate and the simplest to paper. I'll explain why in a future blog. There are times when the other mechanisms are highly relevant and I've used revenue-based warranties in the past to manage deferments. But, they each come with their own downsides too. Simple stupid is often the best approach.
Earn-out success is all about clarity, precision and control
Where creative agency founders encounter difficulty with earn-outs is not in the headline structure, but in the detail. Vague financial definitions, unclear treatment of exceptional items, and ambiguous cost allocation principles create room for interpretation. Equally, agreeing to aggressive performance targets in exchange for a higher headline valuation can prove costly if those targets assume optimal trading conditions under new ownership.
Control is another fault line.
If an earn-out depends on decisions relating to pricing, hiring, investment, or client selection, but those decisions shift to the buyer post-completion, economic exposure remains while operational influence diminishes. That misalignment is structural, so can be avoided. Despite the rumour and gossip, it’s unlikely a buyer will deliberately structure an earn-out so it can be obstructed. Our market is small. Bad actors get discovered quickly.
Where control is lost, it’s more likely due to poor programme structuring and a dodgy SPA. Thus, the solution is disciplined design and robust contract terms.
Financial metrics must be clearly defined. Accounting principles should be agreed in advance. Treatment of central costs and integration expenses should be anticipated, not left to interpretation. The founder’s role and authority during the earn-out period should reflect their economic stake. And performance targets should be stretching yet achievable under reasonable assumptions.
There is an upside too...
Earn-outs are standard in UK creative agency M&A. They are particularly common in founder-led agencies under £20m revenue and in transactions involving private equity-backed buyers. They are not a sign of buyer distrust, but a mechanism for aligning expectations about the future.
When approached thoughtfully, an earn-out can allow founders to participate in continued growth and support a stronger overall transaction outcome. That’s upside. But, when approached casually, earn-outs introduce avoidable risk.
The difference lies in structure, clarity, and governance. For founders considering selling a creative agency, understanding how earn-outs are designed before entering negotiations materially improves leverage and confidence.
Summary
In creative agency sales, earn-outs are neither inherently good nor inherently problematic, they are structural tools.
The difference between a successful earn-out and a disputed one lies in:
Clear definitions
Governance alignment
Realistic targets
Balanced risk allocation
Founders who understand earn-out mechanics before going to market are significantly better positioned in negotiations.
If you are considering selling your creative agency and want clarity on how an earn-out would likely be structured in your transaction, confidential discussion at an early stage materially improves your power.