The fourth way to avoid being burned by an earn-out is to keep the earn-out period short.

It’s important for entrepreneurs to negotiate hard to limit the length of time under which the earn-out metrics are evaluated. There are two key reasons for this: external and internal changes.

First, exogenous factors can limit an entrepreneur’s ability to maximize their payout. If the economy falls into a recession during the earn-out, revenue targets might not be as viable. The longer the earn-out period, the more risk the entrepreneur is taking.

Second, as more time passes the odds of the buyer’s strategy changing increase. While leveraging your company may have been a strategic imperative when it was acquired, market dynamics may dictate a different strategy post-acquisition. Or, perhaps, a new management team was brought into run your acquirer. Either of these factors (and many others) could lead to a change in priorities which could leave your business last in line to receive capital, support or other mission-critical resources.

In sum, it is advantageous for entrepreneurs to minimize the length of the earn-out (so long as they have sufficient time to meet their earn-out benchmarks).