Earn-Out

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An earn-out is an arrangement in an acquisition where part of the purchase price is paid later, only if the acquired business meets agreed performance targets, such as revenue or profit, after the deal completes.

Earn-outs help bridge gaps between buyers and sellers who disagree about a business's value, especially when its future is uncertain. The seller, confident in future growth, can receive a higher total price if the business performs well, while the buyer pays more only if the performance materialises.

For example, a buyer agrees to pay 50,000,000 at completion for a technology company, plus up to 20,000,000 more over three years if the company's annual EBITDA exceeds 15,000,000.

Earn-outs are common in sales of private companies, especially founder-led businesses, where the sellers often remain to run the business.

They can lead to disputes. Sellers may argue that the buyer's decisions, such as changing strategy, allocating costs or integrating the business, prevented targets from being met. Buyers may worry that sellers will focus on short-term targets at the expense of long-term value. Clear definitions, accounting rules and protections in the agreement are essential.

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