Earnouts: the discount rate CFOs forget to negotiate

September 19, 2026 · 5 min · Free, with full transcript

Can an earnout really bridge a valuation gap when rates keep moving? The position here is that most earnouts are a disagreement both sides agreed to postpone, and the discount rate is where the two views collide. A 10 million payout three years out was worth about 9 million at a 3% discount in 2021, and roughly 7.5 million at 8 to 9% today, with no change to the target. You come away knowing how contingent consideration sits as a balance sheet liability, why quarterly remeasurement pushes gains and losses through earnings, and the three conditions for a workable earnout: an ungameable metric like gross profit, a window of two years maximum, and discount treatment fixed in the contract. Examples include pharma contingent value rights, the AbbVie Cerevel deal, and Microsoft's preference for short binary triggers.

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4 min

Chapters

Key takeaways

  • Negotiate how the buyer discounts and remeasures the earnout liability, not only the performance trigger.
  • Pick a metric the seller cannot game and the buyer cannot suppress: gross profit rather than revenue.
  • Keep the earnout window to two years at most so rate swings do not distort the payout.
  • Write the earnout as a fixed nominal amount if triggers hit, so the seller's check does not shrink when rates move.
  • Pull every open earnout, compare the booked discount rate with today's, and warn the board if the gap exceeds two points.
Read the full transcript

Host:Welcome to the Leaders Insights Podcast. Today's episode, structuring earn outs in a volatile rate environment, what CFOs need to get right. An earn out is supposed to bridge the gap when a buyer and seller can't agree on price. You pay part now, part later if the business hits targets. So why do you call most of them a lie waiting to happen?

Expert:Because both sides sign the same document, believing opposite things. The seller thinks the earn out is money they'll obviously collect. The buyer thinks it's money they'll probably never pay. Somebody is wrong, and the discount rate is where the lie lives.

Host:Discount rate, the number you use to translate a future payment into what it's worth today. Walk me through why that's the fault line.

Expert:Contingent consideration, the you'll get more if you perform portion, has to sit on the buyer's balance sheet as a liability the day the deal closes. And you value that liability by discounting the expected future payout. In 2021, when money was basically free, you'd discount at maybe 3%. A 10 million earn out payable in three years looked like 9 million today. Cheap looking promise.

Host:And now?

Expert:Now you're discounting at 8-9% depending on credit risk. That same 10 million promise is worth around 7.5 million today. The buyer's liability shrank by a million and a half without the target changing at all. That's not accounting trivia. That's the seller's future money quietly evaporating on a spreadsheet they never see.

Host:So the seller's getting robbed by arithmetic.

Expert:They're getting robbed by not asking one question. Most sellers negotiate the trigger. Hit 12 million in revenue. Get paid. Almost none negotiate how the buyer discounts and remeasures the liability every quarter. The best operators I've worked with treat the discount mechanism as a term you fight over, same as price.

Host:Give me a real one.

Expert:Look at the farm and biotech world, where earn outs are enormous, sometimes half the deal. When Avi bought Cerevelle in 2024, and across the wave of deals since, you saw contingent value rights tied to milestones. In a stable rate world, those price cleanly. But watch what happened as rates stayed high through 2025 and into this year. sellers booked lower liabilities at close, and every quarter the remeasurement swings hit earnings. CFOs got surprised by their own accounting.

Host:Surprised how? They wrote the contract.

Expert:Because a contingent liability isn't static. Rates move, your probability estimate of hitting the target moves, and both flow through your income statement as a gain or loss. Say you get more optimistic about the target. Congratulations, your liability grows, and you book a loss for doing well. It's perverse. A CFO who didn't model that volatility looks incompetent to their board for something the deal team caused 18 months earlier.

Host:So the durable lesson isn't earn outs or bad?

Expert:No. The lesson is that an earn out only works under narrow conditions, and the great operators know them cold. One, the metric has to be something the seller can't game and the buyer can't suppress. Revenue is gameable. Gross profit less so. Two, the window has to be short, two years max, because the longer it runs, the more rate swings distort it. Three, you fix the discount treatment in the contract so nobody's playing games with the remeasurement.

Host:Fix it how?

Expert:You can't freeze interest rates. You can agree the earn out is a fixed nominal amount if the triggers hit. No time value haggling on the payout to the seller. The buyer still discounts internally for accounting, fine. But the seller's check doesn't shrink because the Fed moved. Or you cap the earn out window so tightly that rate drift barely matters. Microsoft and the big serial acquirers lean towards simple, short, binary triggers precisely because they've been burned by clever ones.

Host:The cynics version. An earn out is a fight both sides postpone.

Expert:Exactly right. It's a disagreement you agreed to have later. And later always arrives with worse information and a worse relationship.

Host:Give me the one thing a CFO does Monday morning.

Expert:Pull every open earn out and check the discount rate you booked it at versus today's. If the gap's more than two points, your liability is mispriced and your next quarterly remeasurement will surprise your board. Tell them before it does.

Host:Sources for today's episode. Financial Times, Accounting Today, CFO Dive, CNBC Finance. That's it. The CFO Decision Tools are live at MBA-training.com.

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