Replacing an Earn-Out With Staged Payments on a Practice Sale

The situation

Samir had spent nine years as an associate dentist in Thunder Bay, working under other owners while he saved toward a practice of his own. When Rivka, a dentist who had built her practice over more than two decades, decided to retire, Samir made an offer. His wife Miriam, also a dentist and the owner of her own smaller practice, was not buying in as a partner, but she co-signed the financing and had a direct stake in getting the deal right.

The asking price was roughly $6.8 million, covering goodwill, equipment, leasehold improvements, and the patient charts that make up most of a dental practice's real value. The proposed structure split the price two ways: about 70 percent in cash at closing, and the remaining 30 percent — roughly $2 million — as an earn-out, a payment contingent on the practice hitting revenue targets over the two years after the sale. The idea, as Rivka's advisor had pitched it, was that Samir would only pay for the revenue that actually stuck around after she left.

Samir came to Treadstone Law to review the purchase agreement before signing. It was his first time buying a business of any size, and the earn-out clause was the piece that made him uneasy, though he could not fully articulate why.

What the review found

The instinct to be uneasy was well placed. On paper, an earn-out sounds fair: the buyer pays more if the business performs, less if it does not. In practice, earn-out clauses are a common source of post-closing disputes, because the buyer is usually the one running the business during the measurement period, and the seller has to trust the buyer's accounting to determine how much they get paid.

Two problems stood out in this deal specifically. First, the draft agreement measured the earn-out against gross billings, without a clear method for handling patients who left the practice for reasons that had nothing to do with the sale — retirement, relocation, a move to a different city. If billings dipped for any reason during the two-year window, the dispute would be about causation: was it the sale, or was it something else entirely? Second, due diligence — the process of verifying the financial and legal condition of a business before buying it — turned up that a meaningful share of the practice's revenue ran through a small number of long-standing patients who had been with Rivka personally for fifteen years or more. There was a real risk that some of that revenue would not transfer to a new owner regardless of how well Samir ran the practice, which meant Samir would be bearing a risk the earn-out formula did not actually price for him.

There was a financing wrinkle too. The lender providing Samir and Miriam's loan was uncomfortable underwriting against a purchase price that was partly contingent and unresolved for two years; it complicated how the lender could register its security against the practice's assets. That pushed the lender toward preferring a fixed price, which put pressure on the deal from a third direction beyond just the two parties.

None of this meant the deal was bad. It meant the earn-out, as drafted, was the wrong tool for splitting the risk between a retiring seller who wanted certainty about her payout and a first-time buyer who wanted certainty about what he was actually paying for.

What we did

1. Modelled what the earn-out would actually pay out. Using the practice's historical billing patterns, our team ran the earn-out formula against a range of plausible outcomes — steady revenue, a modest dip, a larger dip tied to patient attrition. The range of outcomes for the contingent $2 million swung from close to full payment down to well under half, depending almost entirely on how a handful of long-standing patients behaved after the sale, a factor neither side could control or predict.
2. Proposed replacing the earn-out with staged fixed payments. Rather than tying the final third of the price to future performance, we suggested the same amount be paid on a fixed schedule over time, removing the dispute over causation entirely. Rivka would get a payment she could count on; Samir would get a lower closing-day cash requirement without the open-ended risk of a contested earn-out audit two years down the road.
3. Negotiated the price down to reflect the removed uncertainty. A staged payment gives the seller more certainty than an earn-out, so we advised Samir that accepting one without any price adjustment would mean giving up the earn-out's downside protection for nothing in return. After discussion between the parties, the total price moved from $6.8 million to roughly $6.4 million, splitting the difference between Rivka's original ask and the lower value Samir's side attached to a practice with real revenue concentration risk.
4. Secured the staged payments with a vendor take-back charge. A vendor take-back is a form of seller financing where the seller effectively lends the buyer part of the purchase price and takes registered security over specific assets until it is repaid. We registered Rivka's security interest against the practice's equipment and accounts, so that if Samir's practice ran into serious trouble, Rivka's claim to the outstanding staged payments would rank ahead of most other creditors.
5. Added a limited holdback for defined warranty claims. Separately from the staged payments, a smaller amount — about $150,000 — was held back from the closing funds for a fixed period to cover specific, defined problems that diligence could not fully rule out, such as an equipment lease Rivka had represented as current. This was narrower and easier to administer than an earn-out because it turned on a yes-or-no fact, not a revenue calculation.
6. Negotiated a non-competition and non-solicitation covenant. Because so much of the practice's value depended on Rivka's personal relationships with patients, we pushed for a binding commitment that she would not open or work at a competing practice, and would not solicit the practice's patients or staff, for a defined period within the Thunder Bay area. This did more to protect the revenue base than any earn-out formula could.

The outcome

The deal closed on the restructured terms: about $6.4 million total, with roughly $4.6 million paid in cash at closing, and the remaining $1.8 million paid in two fixed installments of $900,000 on the first and second anniversaries of closing, secured by a vendor take-back charge against the practice's assets. The $150,000 holdback was released in full about eight months later once the equipment lease issue was confirmed resolved.

Neither side got everything they wanted, and it is worth being honest about that. Rivka gave up roughly $400,000 off her original asking price and accepted a fixed schedule instead of the chance — real, if unlikely — that a strong two years could have pushed her contingent payment closer to the full $2 million the original earn-out contemplated. Samir gave up the protection an earn-out would have given him if patient retention had come in badly; under the new structure, he owed the staged payments regardless of how the practice actually performed. What both sides gained was certainty, and an agreement that did not depend on interpreting a revenue formula two years after the fact with lawyers on both sides.

Eighteen months after closing, the practice's revenue has tracked close to its pre-sale levels, with some attrition among Rivka's longest-standing patients offset by new patients Samir has brought in himself. Under the old earn-out formula, that outcome would likely have triggered a dispute over how to count the difference. Under the staged payment structure, it triggered nothing at all — the payments came due on schedule, and both sides moved on.

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