When buyers and sellers have different views on the value of a business, the purchase price can quickly become a deal-breaker. Earn-outs can provide a way to bridge this valuation gap: part of the purchase price is not paid at closing but instead depends on the company’s future performance. This may sound like a fair compromise – and it can be. At the same time, however, earn-outs significantly increase complexity and the potential for disputes. Only those who fully understand the mechanics can use this instrument effectively.

An earn-out is a variable, deferred component of the purchase price. Payment is made only if certain targets are achieved during a defined period, the so-called “Earn-Out Period”. Typical performance metrics include revenue, EBITDA or EBIT.

In practice, Earn-Out Periods generally last between one and three years. Longer periods tend to increase the potential for disputes significantly.

An earn-out is not a standard instrument. It is appropriate where there is a valuation gap and both the buyer and the seller have an interest in closing that gap over time.

This is often the case with:

An earn-out is generally less suitable for mature, stable businesses or in situations where the acquired company must be fully integrated without delay. In such cases, it may no longer be possible to measure the relevant KPIs on an isolated basis.

For the buyer, an earn-out is initially attractive. It reduces the risk of overpaying, preserves cash flow and incentivises the seller to support the transition actively and constructively.

For the seller, the picture is more nuanced. An earn-out can increase the overall purchase price and may make a transaction possible in the first place. However, after closing, the seller may have little or no operational influence over the business.

From that point onwards, the buyer makes all decisions that affect the earn-out metric. At the same time, a substantial portion of the agreed purchase price depends precisely on those decisions.

This is why the following contractual provisions are critical.

The quality of an earn-out stands or falls with the precision of its contractual framework:

An earn-out is not a convenient instrument – neither for the seller nor for the buyer. It requires precision in drafting, discipline in post-closing management and a willingness on both sides to continue discussing issues objectively after signing. Where it is suitable, however, an earn-out can be a powerful tool for making transactions possible that might otherwise fail.

The strongest leverage lies before signing: a clear KPI definition, robust operating covenants and a watertight tax structure. Anyone who treats these matters as mere formalities gives the other party a structural advantage – one that is very difficult to recover after closing.