When clinic owners plan to sell, one question inevitably arises: “What is my practice worth?”
When potential buyers and sellers disagree on a practice’s value, an increasingly common structure lets future performance determine the final price: Enter the “earnout”.
What is an earnout?
Earnout are contractual provisions that tie part of the purchase price to the clinic’s future performance. One dental M&A advisor explains it this way: “An earnout allows buyers and sellers to disagree on the valuation of the target company but still manage to agree on a transaction.”1 Instead of paying the full amount at closing, the buyer pays a base price — usually calculated as a multiple of past profit — and agrees to make additional payment if the practice meets or exceeds growth targets after the sale.
A hypothetical practice sale
While oversimplifying the structure, here’s how an earnout works:
ABC Dental made $500,000 in profit over the last 12 months. A prospective buyer has agreed to pay a 5x multiple, i.e., purchase the clinic for $2.5 million. The current owner is confident that the clinic will grow to $700,000 in profit in the following year and believes she should ultimately receive $3.5 million (5x next year’s profit). After some negotiation, the buyer promises to pay an additional $1 million in a year, but only if the clinic grows by $200,000. In other words, the seller agrees to pay 5x on any profit above $500,000 in the agreed period post-sale.
If the clinic grows as projected, the seller receives a substantial cheque a year after the sale. If the clinic’s profit does not increase, no additional payment is made. Such outcomes can leave sellers disappointed, to put it mildly.
When earnouts make sense
In healthcare acquisitions, buyers prefer to base valuations on historical financial performance. Sellers, on the other hand, often believe valuations should be based on future potential. When such disputes arise, the parties’ lawyers and advisors may recommend earnouts to reduce the risk the buyer overpays for a practice while allowing the seller an opportunity to benefit if the practice thrives post-acquisition.2
In the evolving landscape of dental acquisitions, earnout clauses have become increasingly prevalent.3 These arrangements help facilitate transactions, but the incentive structure and post-sale obligations they entail introduce (often) unexpected dynamic for selling practitioners.
The incentive structure
In addition to facilitating transactions, earnouts attempt to align incentives during the transition of ownership. By tying part of the seller’s compensation to future performance, earnouts encourage selling clinic owners to support patient retention, maintain staff relationships, and transfer goodwill to the new owner. This alignment helps address a key buyer concern: that practice value will diminish once the selling dentist steps back or departs.
However, incentives must be structured carefully. As Charlie Munger, longtime business partner of Warren Buffett, famously said, “Show me the incentive, and I will show you the outcome.” Simply put, bad incentives lead to bad outcomes. Experts note that earnouts “can incentivize the seller [clinician] to focus on the short term at the expense of the long term” which can potentially undermine longer-term practice health as well as patient care considerations.4
Incentives matter
The following example illustrates how earnout provisions can create financial pressure for the selling clinician:
A dentist sold their clinic 11 months ago and is nearing the end of their earnout period. The clinic, ABC Dental, currently sits at the breakeven point for the purposes of the earnout calculation. A patient presents with a condition that could be managed conservatively but could also justify a $50,000 treatment plan that would generate $20,000 in profit to the clinic.
If the dentist recommends a “wait and see” approach, the clinic generates nothing under the earnout. If the dentist persuades the patient to pursue the more aggressive treatment option, the clinician (former owner) will receive $100k in additional “purchase price” (5x the incremental $20,000 profit).
While simplistic, this scenario illustrates the ethical tension earnouts introduce. In ordinary commercial settings like retail such implications may be limited. In healthcare, where professional obligations require practitioners to put patients’ interests ahead of financial gain, earnouts can introduce significant ethical implications. An article in the American Medical Association noted that “While an obligation has been established to resolve financial conflicts of interest to the benefit of patients, it is important to recognize that sufficiently large incentives can create an untenable position” for healthcare providers.4
While dentists tend to be highly ethical, it is easy to imagine how revenue targets tied to compensation might, even subconsciously, cause a practitioner to rush, overbook, or focus on lucrative services in lieu of preventive care. Thus, some legal experts caution that although “common in general M&A, these arrangements pose unique regulatory risks in healthcare… [and] can raise significant compliance concerns.”5
Other important considerations of earnouts
Lawyers at Fasken Martineau DuMoulin LLP have noted earnouts are “more susceptible to post-closing disputes than some other private M&A deal terms.”6 Common areas of conflict include:
1. Performance measurement disputes: Disagreements about whether financial targets were achieved and how metrics should be calculated. While it seems calculating post-acquisition profit should be straightforward, in practice, such accounting entails significant discretion.
2. Operational control tensions: Seller healthcare providers may claim buyers hindered performance through operational changes, while buyers will maintain they need flexibility “to run the business they have purchased and to realize the synergies that justified the acquisition price.”
3. Relationship deterioration: The inherent tension between seller protection and buyer autonomy often strains relationships, particularly when financial expectations aren’t met. Where the seller continues to practice at the clinic after the earnout period, the health of the relationship looms large.
Ethical dimensions in healthcare
Earnouts in healthcare settings present ethical and regulatory questions that do not exist in other industries. The regulatory body for dentists in Ontario explains, “The obligation to put patients’ interests first is rooted in fiduciary law, which governs the special legal and ethical relationship between dentists (fiduciaries) and their patients (beneficiaries).”7
This ethical dynamic creates tension in dentistry, where:
- Treatment decisions directly impact practice revenue
- Providers maintain ongoing relationships with patients
- Trust is fundamental to the provider-patient relationship
- Clinical autonomy must be balanced with business objectives
Best practices for ethical earnout structures
To balance business objectives with professional obligations, dental practice transitions should incorporate several best practices:
1. Prioritize long-term value: Design incentives that reward sustainable growth, not just short-term financial performance.
2. Preserve clinical autonomy: Ensure the selling dentists retain appropriate decision-making authority regarding patient care, independent of financial incentives tied to the sale.
3. Broaden performance metrics: Balance -financial metrics with non-financial measures such as patient satisfaction or staff retention. Consider including quality measures such as treatment completion rates or preventive care metrics.
4. Establish ethical safeguards: Set clear boundaries between clinical judgement and financial goals. Ethical safeguards will, by their nature, depend on the seller’s desire to adhere to certain values and standards. Group practices, for example, might align treatment recommendations across multiple providers to reduce individual financial pressure. Involving team members who are not similarly incentivized — such as treatment coordinators — can also help mitigate potential conflicts of interest.
5. Maintain transparency: Encourage open communication between buyers and sellers about practice performance, operational changes, and any potential issues that could impact earnout results.
Conclusion
Before entering a sale that includes an earnout provision, healthcare professionals should consider how performance incentives might influence decision-making. Avoiding earnouts altogether can reduce ethical risk, but this is not always practical. If an earnout is being contemplated, the seller and buyer, together with their advisors, should design them to maximize continuity of care, preserve goodwill, and support the long-term health of the practice and its patients.
Thoughtful structuring — anchored in transparency, fairness and designed to preserve patient trust — can turn an earnout from a source of conflict into a framework of shared success.
References
- Jacob Orosz, Earnouts When Selling or Buying a Business: Complete Guide, Morgan & Westfield, accessed September 25, 2025, online: https://morganandwestfield.com/knowledge/earnouts/.
- Earnouts: everything you need to know, BDO, accessed September 25, 2025, online: https://www.bdo.co.uk/en-gb/microsites/deal-advisory-insights/insights/earnouts-everything-you-need-to-know.
- The Ins and Outs of Earn-Outs: A Delaware Perspective, American Bar Association, March 2022, accessed September 25, 2025, online: https://www.americanbar.org/groups/business_law/resources/business-law-today/2022-march/the-ins-and-outs-of-earn-outs-a-delaware-perspective/.
- AMA Code of Medical Ethics’ Opinions on Financial Incentives and Conflicts under Various Models of Payment for Care, July 2013, available at https://journalofethics.ama-assn.org/article/ama-code-medical-ethics-opinions-financial-incentives-and-conflicts-under-various-models-payment/2013-07.
- Mooradian Law Health Law Team, Navigating Earnouts in Healthcare Transactions: Regulatory Risks and How to Avoid Them, 2025, available at https://mooradian.law/blog/navigating-earnouts-in-healthcare-transactions.
- Fasken Martineau DuMoulin LLP, Earnouts in Private M&A: Negotiation, Drafting and Strategy, 2025.
- RCDSO, Foundation of Professionalism, October 2025, available at: https://cdn.agilitycms.com/rcdso/pdf/professionalism/Foundations_of_Professionalism_RCDSO.pdf.
About the author
Julian Perez, BA, MA, JD, has spent over a decade at the intersection of health law, risk management, and dentistry. A graduate of Yale and Columbia universities, Julian worked in the Professional Conduct and Regulatory Affairs Department with the RCDSO, later transferring to the Professional Liability Program, where he served as Senior Legal Advisor. More recently, Julian served as the Chief Legal Officer and Chief Risk and Compliance Officer at Dentalcorp, supporting over 570 practices. Julian currently serves as Director at Pro Bono Ontario and practices health law with Goodlawyer.