The Earn-Out That Was Never Going to Pay

DentalDex · Deal teardowns · 2 min read · Methodology

Roughly one-sixth of the purchase price was contingent on collections growth that depended on marketing spend, hiring and payer decisions the buyer would control after closing, which made the earn-out closer to a discount than a bonus. This teardown is fictionalized and illustrative.

The offer

Pediatric practice, $2.4M collections, $580K normalized EBITDA. Offer: $3.6M enterprise value at 6.2x, structured as $2.7M cash at closing, $300K rollover, and a $600K earn-out paid over two years if collections grew 8% in year one and a further 8% in year two.

Why 8% looked achievable

The practice had grown 9% and 11% in the two prior years. The DSO's corporate development team pointed to that history.

What the seller found when she asked how

Year one growth had come from a second hygienist and a Saturday schedule. Year two had come from a new-patient marketing campaign that cost $60,000. After closing, the DSO would control the marketing budget, the hiring of any additional hygienist, and whether Saturdays continued. The DSO's integration plan, once she asked for it, called for centralizing marketing across the region and reducing local spend.

The earn-out terms

• Measurement: gross collections, trailing twelve months at each anniversary.
• All-or-nothing at each threshold; no partial payment for 6% growth.
• No adjustment for payer contract changes the DSO chose to make.
• No adjustment if the DSO reduced clinical days or marketing.
• Disputes resolved by the DSO's accountant.

The probability-weighted view

The seller's adviser estimated the year-one threshold at perhaps 40% likely and year two, conditional on year one, at 50%. Weighted, the $600K was worth about $180K. The offer, restated, was $2.7M cash, $300K rollover, and about $180K of expected earn-out, or roughly $3.18M on a realistic basis against a $3.6M headline.

What she negotiated

She asked for three changes: a sliding scale rather than all-or-nothing, a floor on local marketing spend written into the earn-out, and a $150K shift from earn-out to cash at closing. The DSO agreed to the first two and split the third. The final structure was $2.775M cash, $300K rollover, $525K earn-out on a sliding scale with protected marketing spend. Same headline, materially better expected value.

The lesson

An earn-out is the buyer asking the seller to underwrite the buyer's own execution. Sometimes that is fair; a seller who stays and runs the practice has real influence over collections. But the terms decide whether it is a bonus or a discount, and the terms are negotiable. Ask for the integration plan before agreeing to a growth target.

This teardown is fictionalized. Practices, buyers and figures are constructed to illustrate deal mechanics and do not describe any real transaction. Market ranges on this page are illustrative planning ranges, not offers. Involve qualified legal and tax advisers on any transaction.