CATEGORY 106 AUSTRALASIAN DENTIST 2026 EXIT PLANNING SEMINAR DATES ADELAIDE BRISBANE SYDNEY MELBOURNE 20 June 27 June 26 September 17 October Thinking of selling your practice in the next 5 years? Learn how to get the best result when selling one of your greatest assets For more information, or to register visit www.exitacademy.com.au www.practicesalesearch.com.au COLUMNISTS “Earn-outs” explained Lisa Singh Simon Palmer By Simon Palmer and Lisa Singh Practice owners often misunderstand corporate deal terms. We have written this article to provide some clarity about “earn-outs”. What they are, how they are used, why they exist and when they are used. What is an earn-out? An earn-out is a deal structure in business sales where a signi cant portion of the price is paid upfront (for example, 7080%) and the remainder (in this example 20-30%) of the purchase price is paid later, contingent on the business hitting speci c nancial targets (like revenue or pro t or both) in the future. You will nd earn-outs commonly used in corporate dental practice acquisitions/ sales. Why are earn-outs used? An earn-out is typically used as a risk mitigation device in large transactions. In short, a vendor accepting an earn-out deal is usually guaranteeing that they will stick around post sale and ensure: u a smoother and more assured transfer of knowledge and goodwill from the vendor post-sale. u that the future performance of the practice will remain the same or better is guarantee reduces the risk of the purchase for the buyer and, as a result, earnout deals often attract a higher valuation. What are the limitations of earn-outs? 1. is structure will not work if the vendor cannot or simply doesn’t want to be responsible for practice performance targets post sale. 2. e vendor will need to feel enough compatibility with the buyers to work with and for them for this period. 3. In order to be responsible for the nancial outcome of the practice post sale, the vendor will need to feel that the buyers will allow them to have enough control of the operational variables, like the practice’s operating hours, fee structure, consumables ordered, advertising, patient allocation and auxiliary sta hiring and ring. What if I get sick, injured or the practice floods during the earn-out? If you don’t make the target due to factors outside of your control, like sickness, injury or ood, the contract of sale can allow for an extension of the earn-out period, to allow you to make up for this unproductive time that is out of your control. However, this isn’t always agreed to by buyers and any clauses related to this would need to be negotiated in advance (if possible). Are earn-out targets “all-or-nothing”? What happens if I miss the target by $1? e answer to this depends upon the strength of your negotiation. Are earn-outs the same as vendor finance? In short, no. While both earn-outs and vendor nance involve money being withheld from the total agreed price on the date of settlement, with vendor nance there is an obligation on the purchaser to pay the vendor the money withheld, regardless of the practice performance post sale. Vendor nance is extremely rare in the sale and purchase of dental practices, mainly because it is usually relatively easy for dentists to get nance from banks/ nance brokers for reasonably priced practices. If a purchaser needs vendor nance in a deal, it is usually because: u ere is something wrong with the practice (for example: the asking price is too high) OR u ere is something wrong with the purchaser (for example: they may already owe too much money or have some other quality that makes them too risky to lend money to). In summary Earn-outs are a complex and often necessary part of large business sale structures that need to be negotiated carefully, to ensure that the vendor is rewarded for e orts and protected from things out of their control. Expert advice on these clauses from commercial lawyers and experienced dental practice brokers is highly recommended. u Practice Sale Search is the leading dental practice brokerage in Australia. If you would like to have a confidential conversation about your exit plans, email info@practicesalesearch.com.au or call 1300 282 042.
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