Earn-Out

Earn-outs are most common in acquisitions of founder-led businesses, early-stage companies, or situations where the target's future performance is uncertain. If the seller believes the business will grow 30% but the buyer models 15%, an earn-out aligns incentives: the buyer pays a lower upfront price, and the seller receives additional consideration if growth materializes. Earn-outs are rare in public M&A but common in middle-market private deals.

Performance metrics: typically revenue, EBITDA, or operational milestones. Measurement period: usually 1–3 years. Payment caps and thresholds: minimum performance required and maximum payout. Accounting rules: how EBITDA or revenue is calculated post-acquisition (to prevent manipulation). Operating covenants: protections ensuring the buyer does not deliberately underperform the earn-out metrics. Dispute resolution mechanisms.

Earn-outs are one of the most litigated M&A provisions. Disputes arise when: the buyer changes the business (reducing earn-out achievability), accounting definitions are ambiguous, or the buyer allocates costs to the acquired business. Sellers should negotiate strong covenants requiring the buyer to operate the business in a manner consistent with achieving earn-out targets. Buyers should set clear, objective, and measurable targets.