Earnouts in PT Practice Sales: How to Protect Yourself

An earnout is a promise to pay you more if the practice performs after the sale. It can bridge a gap between what you think the clinic is worth and what a buyer will pay up front.

It can also turn into money you never see. The difference usually comes down to how the earnout is written. Here is what to watch.

What an earnout is

An earnout makes part of the purchase price conditional. You get paid only if the practice hits certain results after closing. Those results are measured over a set period, often one to three years.

Say a buyer offers $1,600,000. The offer might be $1,300,000 in cash at closing and up to $300,000 in earnout payments. The earnout pays only if the clinic reaches agreed targets in the first two years.

Buyers use earnouts when they are unsure the results will hold after you step back. That concern is common in PT practices. Patients and referral sources often follow the owner, not the brand.

An earnout shifts that risk to you. If the practice keeps performing, you get paid. If it does not, the buyer pays less. That is not unfair in principle. But the terms need to give you a real chance to earn it.

Tie targets to things you can control

The most important question is simple. Can you actually influence the number you are being measured on?

After closing, the buyer controls staffing, scheduling, billing, marketing and payer contracts. If your earnout is based on clinic profit, the buyer's decisions can lower it. New overhead, changed pay rates or a billing system switch can all reduce profit, and none of them are yours.

Targets closer to your own work are usually safer. Examples include:

• Patient visits per month
• New patient evaluations
• Collected revenue, rather than profit
• Retention of key therapists you recruited

Each target should be defined precisely. Spell out how it is measured, from which reports, and over what period. Vague definitions lead to arguments later.

Keep the period short

The longer an earnout runs, the more things can change that have nothing to do with you. Staff turn over. Payers adjust rates. The buyer reorganizes.

Shorter periods reduce that exposure. Where possible, ask for annual measurement with payments made each year, rather than one test at the end. That way a bad third year does not erase two good ones.

Also consider whether partial results earn partial payment. An all-or-nothing target is harsh. A sliding scale pays you something for getting most of the way there.

Get reporting and protection rights

You cannot check an earnout you cannot see. Ask for the right to receive regular reports on the metrics that drive your payment. Ask for the right to review the underlying records if you disagree.

You may also want limits on what the buyer can do during the earnout period. Common requests include keeping the clinic open, not moving it, and not merging it into another location in a way that hides its results. Some sellers also ask for acceleration. That means the earnout pays in full if the buyer sells the clinic or breaks the agreement.

Your transaction attorney should draft and review all of this language.

Value the earnout in present terms

An earnout is not the same as cash. When you compare offers, discount it for both time and risk.

Say an earnout pays up to $300,000 over two years. Ask yourself two questions. How likely are you to hit the targets? And how much is money in two years worth to you today?

If you think there is roughly an even chance of earning it, treat it as closer to $150,000 than $300,000. Then adjust down again for the wait. That gives you a more honest number for side-by-side comparison.

This is a judgment call, not a formula. But making the call on purpose is better than counting the maximum as if it were guaranteed.

An earnout can be reasonable when it adds value on top of a fair cash price. It works best when targets are tied to your work and the period is short. It is riskier when it makes up a large share of the price or depends on decisions the buyer controls.

We usually push for more cash at closing and a smaller, cleaner earnout. It keeps more of your price in your control.

Your next step

Look at your last 24 months of visits, new evaluations and collections. Know your own trend before a buyer proposes targets. That way you can tell quickly whether an earnout is reachable or built to miss.