For billing company owners
The earnout terms to negotiate when you sell a billing company
If part of your price depends on clients staying, these terms decide what you'll receive, from how revenue is defined to your right to check.
3 minute readBy the Fieldstone Billing teamUpdated
An earnout or revenue share pays you later, based on what happens after you’ve handed over control. So the wording of the agreement decides how much you’ll get. We’d be on the buyer’s side of an agreement like this, so take this list to your own attorney and let them tell you what’s fair.
How revenue gets measured
Pin this down first, because it drives everything else.
- Which clients count? List them by name in a schedule.
- Which fees count? Billing fees only, or also credentialing and anything the buyer sells them later?
- Collected or invoiced? Most agreements pay on money collected, so ask what happens if the buyer is slow to invoice or forgives a client’s balance.
- What if a client moves? If a transferred client gets merged into a group or signs under another of the buyer’s companies, their revenue should still count.
- What if the buyer cuts the price? A discount to keep a client might reduce your payments for a decision you didn’t make.
The payment terms
Write down the share, how often it’s paid and how long it lasts. Then look at these:
- A cap. Is there a maximum total? Buyers usually want one, so it’s reasonable to ask for a floor in return.
- A floor. A minimum total, or a minimum for a set period, protects you from a bad start. Not every buyer will agree to one.
- Payment date. Say how many days after each month or quarter you’ll be paid, and what happens if a payment is late.
Being able to check the numbers
After the handover you won’t be able to see the books, so ask for these in writing:
- A report behind every payment, listing each client and what they paid
- The right to have your accountant check the records, and who pays if they find an error
- Notice when a listed client gives notice or leaves
How the buyer has to behave
Once you’re out, you can’t control how well the clients are looked after, even though your income depends on it. Some things to try for:
- A commitment to keep serving the listed clients in the ordinary course of business
- Limits on raising a listed client’s fees during the period, if you’re worried they’d drive clients away
- A promise that they won’t move clients somewhere that avoids the share
A buyer may push back on some of this, and they’ll have a point if the terms stop them running the business sensibly. That’s a normal negotiation.
When something changes
These are easy to skip, and they’re where sellers can get hurt:
| If this happens | The agreement should say |
|---|---|
| The buyer sells the business or the clients | Whether the remaining payments come due, or transfer to the new owner |
| The buyer goes under | What security you have, if any |
| You die or become ill | Whether payments continue to your family or estate |
| You stop helping with the handover | Whether your share is affected |
| You disagree about a number | How it’s resolved, and who pays |
What you might be asked to sign in return
Expect a request for a non compete or non solicit, so you can’t take the clients back. Check how long it lasts and where it applies. Rules differ by state, so have your attorney read it, particularly if you plan to keep some clients or do some consulting.
Tax
A contingent payment can be taxed differently from how the contract describes it. IRS Publication 537 says that if a sales contract calls for payments in a later year with little or no interest, you may have to figure unstated interest. Ask your tax adviser before you sign. Our tax questions guide has a list to bring.
If you want to see what a share might come to, try the calculator with your own numbers.
Fieldstone may be a buyer in a sale like this, so read this guide with that in mind. It's general information, and it isn't legal or tax advice.
