Earn-Out vs Equity: Structuring Healthcare Deals the Right Way

One of the biggest structuring questions in healthcare M&A is whether to use an earn-out or equity rollover when agreeing a deal. The choice between the two has a major impact on value, alignment and post-completion performance, so understanding when to use each approach is essential.

When an Earn-Out Structure Works Best

An earn-out is often the right tool where a management team is planning to step back over a two or three year period but remains central to the business today. It allows for a gradual transition out of day-to-day operations, giving the buyer protection that profitability is maintained or, more likely, that the growth originally envisaged is achieved.

For founders, earn-outs can be an effective way to realise value while still benefiting from the business’s continued success. However, the targets set must be realistic, measurable and within the management team’s control. Poorly structured earn-outs can create tension and misalignment if performance is influenced by external factors or integration decisions outside the seller’s remit.

When Equity Rollover is the Better Option

There are situations where an equity rollover is a better fit than an earn-out. This is particularly true where there is significant cross-selling potential between the target and the acquirer. In such cases, measuring the target’s standalone profitability post-completion can restrict collaboration and hold back value creation.

By rolling equity into the acquiring company, management teams are incentivised to focus on the performance of the combined group rather than just their legacy business. It ensures everyone is pulling in the same direction and rewards the creation of value across the wider platform.

Rollover equity can also be important where individual vendors are expected to play key roles within the acquirer’s management team, or where the acquirer has a defined exit horizon. For example, if a private equity investor is planning to exit within three years, structuring the deal purely around a two-year earn-out may not create the right long-term alignment. Equity rollover helps ensure that both sides are working towards the same goal.

Choosing Between Earn-Out vs Equity

The decision between earn-out vs equity depends on the circumstances of the deal and the objectives of both parties. The best structures are those that align incentives so that buyers and sellers remain focused on shared success.

In every case, the goal is to strike the right balance between protection, motivation and simplicity. When done properly, the chosen structure not only safeguards value but also sets the foundation for a smooth integration and continued growth.