Earn-out
Contingent payments to the seller based on the business achieving specified future performance targets.
Full Definition
An earn-out is a mechanism where part of the purchase price is contingent on the acquired business achieving agreed performance targets after completion. It helps bridge valuation gaps when buyer and seller have different expectations about future performance.
Common earn-out metrics:
- Revenue targets
- EBITDA or profit targets
- Customer retention
- Contract wins
- Product milestones
Typical earn-out structures:
- Fixed payments if targets met
- Scaled payments based on achievement level
- Caps and floors on payments
- Multiple measurement periods (1-3 years common)
Key negotiation points:
- Target metrics and definitions
- Measurement methodology
- Buyer conduct of business restrictions
- Information and audit rights for seller
- Dispute resolution mechanisms
- Acceleration on change of control
Challenges with earn-outs:
- Disputes over target calculations
- Buyer manipulation of results
- Integration conflicts with earn-out goals
- Complex accounting treatment
- Tax timing issues for sellers
Best practice: Clear, objective metrics with detailed calculation methodology and robust dispute resolution mechanisms reduce post-completion conflicts.
Related Terms
Deferred Consideration
Part of the purchase price paid after completion, often tied to future business performance or time-based milestones.
Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Completion
The legal transfer of ownership when all conditions are satisfied and the transaction formally closes.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation – a key profitability metric used in valuations.