What an earn-out is
An earn-out splits the price into two parts: cash you receive when the deal completes, and further payments that depend on how the business performs afterwards, in our experience usually measured on revenue or profit over one to three years.
Example of the shape (illustrative only): a buyer offers S$8 million, made up of S$3 million at completion and up to S$5 million more if profit reaches agreed targets over the next two years. Whether you ever see that S$5 million depends on the targets, the accounting and decisions made by a new owner.
Why buyers propose them
- To bridge a valuation gap. You believe in next year’s growth; the buyer wants proof before paying for it.
- To keep you engaged. If the business depends on you, an earn-out ties part of your reward to staying and performing.
- To share risk. Uncertain contracts, a new product or a recovering year can be priced through an earn-out rather than a lower headline.
The risks for a founder
The deal that looks like S$8M on the headline is often S$3M on day one, with S$5M tied to targets you can’t control under a buyer you don’t trust yet.
Gwee Yi Chen, Growth Alliance Capital
In our experience the risks are:
- Control. After completion the buyer runs the business. Its decisions on pricing, staffing, overheads or integration can move the very numbers your earn-out depends on.
- Definitions. “Profit” can be calculated many ways. Group charges, new costs and accounting changes can shrink it.
- Time value and credit risk. Money paid in two years is worth less than money today, and depends on the buyer still being willing and able to pay.
- Disputes. Earn-outs are a common source of post-completion disagreement when terms are loose.
How to negotiate a better earn-out
In our experience the protections that matter most are:
- Maximise the cash at completion. Treat the earn-out as upside, never as the number you are selling for.
- Choose a measure you can see and influence. Revenue is harder to manipulate than net profit; gross profit sits in between.
- Define the accounting precisely. Same policies as before the sale, no new group charges, and a worked example in the agreement.
- Protect how the business is run. Covenants that the buyer will operate the business in good faith and not deliberately frustrate the targets.
- Pay in steps, not all-or-nothing. A sliding scale avoids losing everything by missing a target narrowly.
- Shorten the period. One or two years is easier to forecast and influence than three.
- Agree how disputes are resolved. An independent accountant determination is faster and cheaper than litigation.
A note on tax
Singapore does not generally tax capital gains, and IRAS states that gains from selling shares in Singapore are generally not taxable for individuals. On earn-outs specifically, IRAS published an advance ruling in April 2025 (Summary No. 01/2025) on a one-off payment made to settle an earn-out in a share sale, ruling that it was “capital in nature and not subject to tax under Section 10(1)” of the Income Tax Act. That ruling turned on its own facts and is “binding only in respect of the applicant,” so it is a useful signal, not a general rule. Take tax advice on your own structure before you sign.
Should you accept one?
An earn-out is not good or bad in itself. It is a tool for closing a gap. Accept one when the cash at completion already works for you, the targets are realistic and within your influence, and the terms are tight enough that you will actually be paid if the business performs. In our experience, the best way to need less of one is competition: when several buyers want your company, more of the price moves into cash at completion.
This guide summarises IRAS sources as at the date shown together with Growth Alliance Capital’s own experience, which is labelled as such. It is not tax or legal advice.