Earn-out

What it means

An earn-out is the part of a company’s purchase price that the buyer does not pay at signing but later, and only if the business reaches agreed results after the sale. The yardstick is usually sales, adjusted EBITDA, customer numbers or a specific milestone.

The mechanism solves a common problem in the sale of a business: the seller believes in growth and wants a higher price, while the buyer is more cautious. The earn-out bridges the gap, since the higher price is paid only if the seller’s optimism is borne out by the numbers.

It typically runs for one to three years, and the seller often stays on as a manager. Their reward is then tied directly to results they still influence, which also helps the business through the change of ownership.

How it works in practice

Defining the calculation precisely is key. The contract should set out which accounting rules the measure is based on, what is excluded, such as integration costs or management charges from the new owner, and who checks the calculation and when.

For accounting and tax it is a contingent part of the price. For the seller the income is usually taxed in the period when the entitlement arises and the amount is known; for the buyer it increases the acquisition cost of the stake. In the valuation and the buyer’s accounts it is treated as a contingent liability.

We help clients prepare their numbers so that they negotiate an earn-out from a solid base: a clean history, normalised results and a realistic plan. An earn-out built on an unrealistic plan rarely pays off.

What to watch out for

The biggest risk for the seller is loss of control. The new owner may change pricing, move work to another group company or raise costs, and the target is missed through no fault of the seller. The contract should include protective rules for the earn-out period.

For the buyer, the risk is that the seller maximises the measure in the short term at the expense of the business’s long-term health, for example by cutting investment. That is why measures are combined and the quality of revenue is watched too.