The first way to avoid being burned by an earn-out is to base the payout on simple metrics.

Earn-outs are most effective when the size of the payout is determined based upon one or two simple variables. For example, higher revenue might lead to a higher payout to the shareholders of the acquired company.

In contrast, imagine an earn-out based upon price changes, customer acquisition cost and customer retention. To complicate matters, these variables might be woven together in an arbitrary equation that provides each metric with a weighting. In pursuit of maximizing the payout, management might focus on trying to optimize too many variables in the business, potentially resulting both in management not focusing on what matters most to the buyer and making it difficult for management to maximize their payouts.

Simplicity provides incentive alignment, clear objectives and less room for argument when it comes time to sign the check.