Earnouts in Australia: 2025 Guide for Business Sales & Mergers

In the fast-evolving landscape of Australian mergers and acquisitions (M&A), earnouts are an increasingly popular mechanism for structuring business sales. Whether you’re an entrepreneur selling your company, a private equity buyer, or an advisor looking to craft a win-win deal, understanding earnouts is essential in 2025. With regulatory changes, economic headwinds, and sharper buyer scrutiny, the way earnouts are negotiated and enforced is changing—often dramatically.

What Is an Earnout and Why Use One?

An earnout is a contractual arrangement in which a portion of the sale price for a business is paid out later, contingent on the business achieving specific financial or operational targets post-sale. For example, a seller might receive $5 million upfront and another $2 million if the business hits a revenue target over the next two years.

• Bridges Valuation Gaps: Earnouts help buyers and sellers agree on price when future performance is uncertain.

• Risk Sharing: Sellers participate in upside if targets are met, while buyers limit overpayment risk.

• Alignment: Earnouts can keep key staff or founders engaged post-sale, ensuring business continuity.

In 2025, earnouts are especially common in technology, healthcare, and high-growth sectors—areas where future profits are harder to predict. For example, a software startup with fast-growing but volatile revenues may attract a higher overall price if the seller is willing to accept part of it via an earnout.

Key Trends and Policy Updates for 2025

This year, several shifts are influencing how earnouts are structured in Australia:

• Taxation Changes: The ATO’s 2024-25 guidance clarifies how earnouts are taxed, with new rules on capital gains tax (CGT) timing for both standard and “look-through” earnouts. Most notably, sellers may now be able to defer CGT until earnout payments are received, reducing upfront tax bills.

• Increased Regulatory Scrutiny: ASIC is monitoring the use of aggressive earnout structures in listed company transactions, warning against arrangements that could distort reported profits or mislead shareholders.

• Longer Earnout Periods: Deal data shows that average earnout periods have lengthened from 2 to 3+ years, reflecting greater buyer caution amid economic uncertainty and the lingering impacts of global supply chain disruptions.

• Performance Metrics Are Evolving: While revenue and EBITDA remain common, more earnouts are being tied to non-financial metrics such as customer retention or key contract wins, especially in SaaS and services businesses.

For example, in the recent sale of a Melbourne-based medtech firm, 40% of the purchase price was structured as an earnout tied to regulatory approvals and patient uptake milestones, not just financial targets.

How to Structure a Successful Earnout

Negotiating an earnout is as much art as science. Here are practical tips and pitfalls to watch for in 2025:

• Be Precise with Targets: Vague targets are a recipe for disputes. Clearly define metrics (e.g., “audited EBITDA of $2 million in FY2026”), include accounting methods, and set out dispute resolution processes.

• Control and Influence: Sellers should negotiate for continued involvement or influence over key decisions if their payout depends on post-sale performance. Buyers, meanwhile, want flexibility to run the business as they see fit—balancing these interests is crucial.

• Cap and Floor Arrangements: Consider setting minimum and maximum earnout payouts to manage expectations and limit risk for both parties.

• Tax and Legal Review: Engage advisors familiar with the latest ATO guidance to ensure the earnout is tax-efficient and compliant with the Corporations Act and ACCC rules.

• Transparency and Reporting: Agree upfront on how results will be tracked and reported—mismatched data or disputes over accounting standards are a leading source of litigation in earnout deals.

Take the example of a Queensland IT consultancy sale in early 2025: the earnout was structured with quarterly reporting, independent audits, and a mediation clause. As a result, both sides had clarity and avoided the costly disputes that plagued similar deals in the past.

Real-World Examples of Earnouts in Action

Earnouts are no longer just a tool for large corporate takeovers. In 2025, they’re being used in transactions ranging from small business sales to major cross-border M&As:

• Startups: A Sydney fintech’s $12 million exit included a two-year earnout tied to user growth, allowing the founders to share in the upside as the acquirer scaled the platform.

• Family Businesses: In regional Victoria, the sale of a third-generation manufacturing firm used an earnout to ensure a smooth transition and retain key customer contracts, with the outgoing owner consulting for 18 months.

• Private Equity: PE firms are using earnouts to de-risk investments in sectors still recovering from COVID-era volatility, tying payouts to post-deal profit improvements.

These examples highlight the flexibility of earnouts—but also the need for careful planning, negotiation, and documentation.