Healthcare Founder Toolkit

This is the most common reason. Buyer and seller cannot agree on the headline number. An earnout lets both sides say yes — the buyer pays more only if the business performs, and the seller gets closer to their desired price if it does.

In practice, the earnout targets are often set at levels that represent strong or best-case performance. That is worth noting. Agreeing to an earnout is agreeing to receive part of your payment only if the business performs at or above its best historical trajectory.

In most Indian healthcare acquisitions, the founder is the business. They hold the key relationships with referring doctors, they lead the clinical team, they know the operating model inside out.

A buyer acquiring a hospital or diagnostics chain without the founder’s active involvement for the transition period is taking on real risk. An earnout tied to post-sale performance is one way to ensure the founder stays engaged.

This is a legitimate reason for an earnout. The question is whether the size and structure of the earnout reflects this fairly — or whether it places excessive risk on the founder for outcomes they no longer fully control

In some cases, the earnout is primarily a financing mechanism — the buyer simply prefers to pay less upfront and more over time. This is the least founder-friendly reason for an earnout, and worth identifying early.

If the earnout is primarily about managing the buyer’s cash position rather than managing genuine uncertainty about business performance, the terms deserve more careful scrutiny.

This is the most important question in any earnout negotiation. The metric chosen to measure the earnout determines both how achievable the targets are and who has the most influence over hitting them.

Revenue-based earnouts are straightforward to measure. But once a buyer takes over, decisions about pricing, sales strategy, and which customers to prioritise are largely theirs. A founder working hard to hit a revenue target has limited control over decisions that directly affect it.

EBITDA-based earnouts introduce a different problem. The buyer typically controls operating costs after closing. In theory, a buyer could increase costs — through new hires, central overhead allocations, or restructuring charges — in ways that reduce EBITDA and, with it, the earnout payment. This is why EBITDA-based earnouts sometimes produce disputes. What counts as “adjusted EBITDA” is less obvious than it appears.

Earnout targets create incentives — and incentives shape behaviour. This is not cynical. It is simply how structured agreements work.

A revenue-based earnout can push a post-sale founder to prioritise volume over clinical quality, or to accept patients and contracts that dilute the strategic positioning of the business. A buyer watching this happen may not be able to intervene without triggering a dispute over the earnout terms.

A profitability-based earnout creates the opposite pressure. The buyer, now controlling costs, could argue for expense decisions that reduce reported profit and reduce the earnout payment owed.

Neither of these scenarios requires bad faith. They are natural consequences of how the incentives were structured. Before agreeing to an earnout structure, think through what behaviour each side is being incentivised to adopt — and whether those incentives are aligned with what you actually want for the business.

This is a point that often gets overlooked. When a buyer proposes an earnout, they are effectively offering to pay a certain amount for incremental performance. That implicit valuation multiple is worth calculating explicitly.

Here's an example:

• Company acquired at 8x EBITDA on current earnings of ₹10 crore
• Buyer proposes: ₹8 crore earnout if EBITDA grows to ₹14 crore in Year 2

The earnout is paying ₹8 crore for ₹4 crore of incremental EBITDA. That is a 2x multiple on the incremental earnings — compared to the 8x multiple paid for the base business.

The buyer is acquiring additional earnings at a significant discount. That is not necessarily unfair — incremental performance under new ownership is genuinely uncertain — but it is worth understanding what multiple is implicitly being paid for the earnout portion of your proceeds.

Before agreeing to an earnout, ask directly: where does the money come from when the target is hit?

In the best case, the earnout is funded from the cash the business generates after closing. That is clean. In other cases, the buyer may need to raise additional debt or equity to make the payment. If they have difficulty doing so — because credit conditions have changed, or the business has had a difficult period — the earnout payment may be delayed, restructured, or disputed.

When an earnout represents a significant portion of the total consideration, founders sometimes ask for a board seat post-closing as a way of maintaining influence over decisions that affect their earnout targets.

This is understandable. It is also worth thinking through carefully.

Post-closing board dynamics between an outgoing founder and an incoming management team are rarely straightforward. The founder is emotionally connected to the business. The new team is trying to implement changes. The buyer may need to make decisions — restructuring, strategic pivots, cost rationalisation — that the founder disagrees with.

What was intended as protective oversight can easily become a source of friction that delays decisions, strains the relationship, and makes the transition harder for everyone, including the founder.