The Earnout Explained: What It Is and Why It Matters in Healthcare M&A

In healthcare M&A, the purchase price and the amount a seller actually walks away with on closing day are not always the same thing. In today's market especially, a growing portion of that number may not arrive at closing. It arrives later, and only if certain conditions are met.

That deferred piece is called an earnout. And if you are a healthcare practice owner considering a sale, understanding how earnouts work is one of the most important things you can do before signing anything.

We break it down in this article. 

Want to know more about M&A terms? Check out our blog: The ABCs of Healthcare M&A 

What Is an Earnout?

An earnout is a contractual mechanism that ties a portion of the purchase price to the future performance of the practice after closing. Instead of receiving the full agreed-upon value at closing, the seller receives a base payment upfront and earns additional compensation over a defined period (typically one to three years) if the practice hits specific targets.

On the surface, the logic is reasonable. The buyer wants assurance that the practice performs without the selling provider at the helm. The seller believes it will. The earnout is how both sides split that uncertainty.

In practice, earnouts are far more complicated than they appear on paper. Sometimes, they can even be seller-unfriendly. That’s why it’s so important for sellers to understand exactly what the terms will mean moving forward. 

Earnouts for Dental Sellers: Why DSOs Are Using Them More

In a recent episode of our podcast, Office Hours for Practice Owners, Bill Neumann, co-founder and CEO of Group Dentistry Now, described a shift in the dental industry. He discussed the way DSOs are approaching acquisitions in 2026. The groups that are still active in the market, he noted, are moving more carefully than they did during the acquisition frenzy of 2020 and 2021.

"They have a lot more boxes they need to check when they are buying a practice," Neumann said. "They're probably not giving as much cash up front. It's probably more on the back end."

That shift, less cash at closing, more deferred on the back end, is precisely where earnouts live. As buyers tighten their diligence and grow more cautious about overpaying, sellers should expect to see earnout provisions more frequently and with more structural complexity than in prior deal cycles. It’s not just dental; other healthcare verticals can find similar trends. 

Listen to Bill Neumann’s full episode here:

Signals vs. Noise: What’s Really Happening in the DSO Market 2026

How Earnouts Are Structured

An earnout provision typically defines four things:

The Metric 

This is what the seller must achieve to earn the deferred payment. Common metrics in healthcare transactions include gross collections, net revenue, EBITDA, or patient visit volume. In dental deals specifically, gross collections is often the starting point. But, how the metric is defined matters enormously across all practice types. Gross collections and net revenue are not the same number. EBITDA can be calculated in multiple ways. Before signing, sellers need to understand exactly what they are being measured against and how that figure will be calculated.

The Measurement Period

This is the window of time during which the seller's performance is evaluated. It’s often one, two, or three years post-closing. Longer periods introduce more variables outside the seller's control.

The Payout Structure 

Some earnouts are binary. (Hit the target, receive the payment. Miss it, receive nothing.) Others use a sliding scale tied to percentage attainment. Understanding whether there is a floor, a ceiling, and what happens at various performance thresholds is essential.

The Payment Timeline 

Earnout payments are typically made annually or at the end of the measurement period. Sellers should understand when they will receive funds and what triggers an early payment or forfeiture. Understanding how payment works in the event of a subsequent sale or change of control of the acquiring entity is also important. Sellers can and should negotiate for automatic acceleration (full earnout paid out immediately) if the acquirer is itself sold during the measurement period.

The Problem Sellers Discover Too Late

Here is the fundamental tension of every earnout: after closing, the seller typically becomes an employee. The decisions that affect practice performance, including overhead, staffing, fee schedules, insurance participation, and technology spend, are now made by the buyer.

It’s important to remember that earnouts will interact with the employment relationship. For example, what happens to the earnout if the seller is terminated without cause, resigns for good reason, or is unable to work due to disability during the measurement period? These are common scenarios. Sellers often do not realize these scenarios may not be addressed at all in the purchase agreement, and that silence usually favors the buyer.

In addition, as Bill Neumann put it in the context of the dental market, the dynamics shift in ways sellers do not always anticipate. Buyers are focused on same-store efficiency, cost containment, and internal operations. Decisions made at the platform level can directly affect what a single practice produces and whether that practice hits the targets the seller agreed to.

A seller can work just as hard as they always did and still miss their earnout through no fault of their own. New management fees, increased overhead mandates, changes to insurance contracts, or shifts in patient flow between locations can all suppress the metric the earnout is tied to.

This is not hypothetical. It is one of the most common sources of post-closing disputes in healthcare transactions we’ve seen, and that’s across dental, medical aesthetics, optometry, behavioral health, veterinary, and beyond.

The Legal Protections That Matter

Earnout provisions are negotiable. The degree to which a seller is exposed to post-closing manipulation of the earnout metric depends almost entirely on what protections are built into the purchase agreement. Here is what sellers should push for:

• Defined overhead treatment. If the earnout is tied to an income-based metric like EBITDA, the agreement should specify which expenses are included in the calculation. New management fees, allocated corporate overhead, or debt service introduced after closing should not automatically reduce the seller's earnout base.

• Anti-manipulation language. The agreement should include explicit covenants restricting the buyer from taking actions specifically designed to suppress the earnout metric. This includes restrictions on moving patients, altering fee schedules, or changing the practice's insurance mix in ways that are outside the ordinary course of business.

• Audit rights. Sellers should have the contractual right to review the financial records used to calculate earnout payments. Without audit rights, sellers are entirely dependent on the buyer's reporting with no independent ability to verify accuracy.

• A dispute resolution mechanism. If the parties disagree on whether targets were met, there should be a clear process for resolving that dispute. This typically involves an independent accountant or arbitrator and defined timelines.

• Caps and baskets. These provisions define the outer limits of the earnout, including what the maximum payout is and whether small variances trigger or forfeit payments. Sellers should understand both.

  
  

What This Means for Your Deal

Earnouts are not inherently bad. In some transactions, they allow a seller to capture upside they would not otherwise receive at closing. But they carry real risk, and that risk increases significantly when the provisions are vague, the metrics are undefined, or the seller has no contractual protections after the deal closes.

The market Bill Neumann described, where buyers are more cautious, paying less cash upfront, and asking more of sellers before and after closing, is precisely the environment where earnout provisions deserve the most scrutiny.

The headline number on the LOI is where negotiations start. The earnout language in the purchase agreement is where they finish. Both buyers and sellers should be sure you understand both. 

A special note to sellers: Don’t wait until the purchase agreement to focus on the earnout. The LOI s often treated as a non-binding document, but in practice, whatever earnout framework is agreed to in the LOI (the metric, the measurement period, the total amount) tends to stick. Buyers will resist significant changes later in the process, arguing the economics were already agreed upon.

If you are evaluating an offer or navigating a healthcare practice transaction, reach out to our team to discuss what your deal structure actually means for you.