{"id":4764,"date":"2025-01-10T16:11:41","date_gmt":"2025-01-10T15:11:41","guid":{"rendered":"https:\/\/maraz.es\/?p=4764"},"modified":"2026-10-12T18:41:08","modified_gmt":"2026-10-12T16:41:08","slug":"earn-outs-as-a-transaction-closing-tool","status":"publish","type":"post","link":"https:\/\/maraz.es\/en\/earn-outs-as-a-transaction-closing-tool\/","title":{"rendered":"Earn-out as a transaction closing tool"},"content":{"rendered":"<h2><strong>The earn-out as a tool for closing transactions<\/strong><\/h2>\n<p>In a company sale, the main point of contention usually arises when both parties try to convert the value of the business into a closing price.<\/p>\n<p>The seller tends to believe that the price should reflect not only the current reality of the business, but also the growth already under way, the commercial pipeline yet to mature, the operational potential not yet monetised or the synergies a third party will be able to capture with relative ease. The buyer, by contrast, usually adopts a more cautious position: it is willing to pay for what the company has already demonstrated, but not always for what it still has to execute.<\/p>\n<p>That disagreement does not mean the deal is doomed to fail. In fact, in today&#8217;s M&amp;A market, where transactions are increasingly selective and sophistication in price structuring carries more weight, <strong>the earn-out has established itself as one of the most effective tools for bridging that valuation gap without blocking the closing,<\/strong> especially where there are discrepancies in the <a href=\"https:\/\/maraz.es\/en\/business-valuation-sale\/\">valuation of the company<\/a> between buyer and seller. This technique allows part of the price to depend on the company&#8217;s future performance, providing an effective solution for overcoming differences of opinion about current value and the business&#8217;s projections.<\/p>\n<h2>What is an earn-out<\/h2>\n<p><strong>The earn-out is a contingent price mechanism whereby part of the consideration is not paid in full at closing, but is made conditional on the acquired company meeting certain future targets.<\/strong><\/p>\n<p><strong>From a practical standpoint, it makes it possible to split the price into two tranches:<\/strong><\/p>\n<ul>\n<li><strong>A first component, fixed<\/strong> and payable,<\/li>\n<li><strong>And a second, variable component, whose accrual depends on the business reaching certain metrics or milestones within a subsequent period<\/strong>.<\/li>\n<\/ul>\n<p>That said, reducing the earn-out to the idea of a &#8220;variable price&#8221; falls short. <strong>Its real usefulness lies not only in deferring part of the payment, but in redistributing risk between buyer and seller.<\/strong> <strong>In other words, it turns an abstract discussion about future expectations into a verifiable agreement about results actually achieved.<\/strong><\/p>\n<p>That is why the earn-out should not be understood as a mere concession by the buyer or an optimistic expectation on the seller&#8217;s part. Properly designed, it is a tool for allocating risk and aligning interests.<\/p>\n<h2>Why it is used in an M&amp;A transaction<\/h2>\n<p>The economic logic of the earn-out is clear. The seller believes the value of the business will be higher in the short or medium term and wants the price to reflect that. The buyer, for its part, does not want to bear today the cost of a projection that has not yet been consolidated.<\/p>\n<p><strong>The earn-out allows both positions to coexist within the same contractual structure. The buyer protects itself against the risk of overpaying. The seller retains the possibility of capturing part of the value it defends, provided that value actually materialises.<\/strong><\/p>\n<p>This is especially useful when the company is in a growth phase, when there is a significant component of future execution, when the business depends heavily on contracts in the process of being consolidated, or when the continuity of the founder or management is an important part of the investment thesis.<\/p>\n<p>It can also be a particularly effective solution in sectors where value creation is not yet perfectly reflected in operating profit, as happens in certain technology, SaaS, healthcare and biotech businesses or in models intensive in commercial expansion.<\/p>\n<h2>The earn-out does not solve only a price problem<\/h2>\n<p>One of the most common mistakes when negotiating this type of clause is to think that the earn-out serves only to &#8220;bring the numbers closer&#8221;. <strong>In reality, it performs a rather more sophisticated function:<\/strong><\/p>\n<ul>\n<li>On the one hand,<strong> it makes it possible to close the valuation gap between the parties. <\/strong><\/li>\n<li>On the other,<strong> it acts as a governance tool for the transaction, because it forces the parties to anticipate how the future performance of the business will be measured, who will control the variables that affect that performance and what will happen if the parties disagree about the final calculation.<\/strong><\/li>\n<\/ul>\n<p>In this sense, the earn-out is not just a financial solution. It is also a contractual technique that forces the post-closing relationship to be put in order.<\/p>\n<h2>When it makes sense to propose one<\/h2>\n<p><strong>Not every transaction needs an earn-out.<\/strong> In many deals, a combination of a fixed price, adjustments for net debt and <a href=\"https:\/\/maraz.es\/en\/what-is-working-capital-and-why-is-it-critical\/\"><strong>working capital<\/strong><\/a> and a reasonable regime of <a href=\"https:\/\/maraz.es\/en\/reps-warranties-legal-protections-in-ma\/\"><strong>representations and warranties (reps &amp; warranties)<\/strong><\/a> is enough to close the agreement efficiently. Those closing adjustments are precisely part of what is reviewed in a <a href=\"https:\/\/maraz.es\/en\/financial-due-diligence-checklist\/\"><strong>financial due diligence<\/strong><\/a>.<\/p>\n<p><strong>However, the earn-out usually makes particular sense when there is a material difference between the valuations defended by buyer and seller; when part of the value depends on identifiable future milestones; when the seller remains involved in the business after the sale; or when the buyer needs to moderate the initial outlay without giving up the option of recognising a higher price if performance follows.<\/strong><\/p>\n<p>In other words, <strong>it works best when the disagreement is not about the past, but about the future.<\/strong><\/p>\n<h2>The decisive question: how it is structured<\/h2>\n<p>The usefulness of an earn-out depends not on its existence, but on its design. Most post-closing conflicts arise not because the business performs worse than expected, but because the clause was badly thought out, ambiguous or left too many questions open.<\/p>\n<h3>The metric: what is measured and what risk each party bears<\/h3>\n<p>The choice of metric is probably the most sensitive aspect of the whole negotiation. It is not just a matter of choosing a well-known financial magnitude, but of deciding what risk each party bears and how exposed the seller will be to the buyer&#8217;s subsequent decisions.<\/p>\n<p><strong>A revenue-based earn-out usually protects the seller better against accounting manipulation or cost reallocation, because the sales figure is, in principle, harder to alter artificially.<\/strong> However, it can also create perverse incentives if whoever continues to run the business prioritises commercial growth at the expense of profitability.<\/p>\n<p><strong>An <a href=\"https:\/\/maraz.es\/en\/how-to-interpret-ev-ebitda\/\">EBITDA<\/a>-based earn-out fits better with the classic logic of multiples-based valuation, but precisely for that reason it demands much more detail: which adjustments are permitted, which extraordinary items are excluded, how the corporate costs of the acquiring group will be treated<\/strong>. In businesses where value is explained by growth rather than immediate profit, it is sometimes preferable to measure on operating metrics (ARR, churn, gross margin) or on <a href=\"https:\/\/maraz.es\/en\/free-cash-flow-financial-health-barometer\/\"><strong>free cash flow<\/strong><\/a>, which better reflects the cash actually generated.<\/p>\n<p>In businesses where value is better explained by growth than by immediate profit, it may even be preferable to turn to specific operating metrics, such as ARR, churn, new customers, renewals, gross margin or the achievement of regulatory or technological milestones. Here, the key is not to choose the &#8220;best-known&#8221; metric, but the one that best reflects real value creation in that specific business.<\/p>\n<h3>The measurement period<\/h3>\n<p>The duration of the earn-out is also decisive. <strong>Too short a period may prevent the growth thesis from showing in the numbers. Too long a period prolongs uncertainty, complicates integration and can sour the relationship between the parties.<\/strong><\/p>\n<p>In practice, the design must respond to the real cycle of the business. If value depends on recurring sales, commercial integration or customer acquisition, the horizon will be one thing. If it depends on regulatory, technological or industrial-consolidation milestones, it will be another. What matters is that the term has economic logic and is not simply the result of an improvised concession.<\/p>\n<h3>Post-closing governance<\/h3>\n<p>This is where a well-drafted earn-out differs from a problematic one.<\/p>\n<p><strong>Once the deal has closed, the buyer controls the company. But if the seller has a significant part of the price outstanding, it cannot be left fully exposed to unilateral decisions that artificially alter the agreed metric. That is why it increasingly makes sense to expressly regulate certain operating covenants during the accrual period.<\/strong><\/p>\n<p>This may include commitments on maintaining the business unit with a reasonable degree of autonomy, restrictions on the reallocation of revenue or costs within the group, limits on accounting changes affecting the calculation, an obligation not to divert business opportunities to other subsidiaries, maintenance of certain investment levels and periodic access by the seller to relevant financial information.<\/p>\n<p>It is not about tying the buyer&#8217;s hands or preventing integration. It is about preventing the earn-out from being emptied of content by management the seller no longer controls.<\/p>\n<h3>The calculation formula<\/h3>\n<p><strong>The formula must be clear, verifiable and as simple as possible.<\/strong> It is advisable to set precisely the minimum threshold that triggers payment, the accrual scale, the maximum cumulative amount and the date on which payment becomes due. None of these rules lives in isolation: they are integrated into the sale and purchase agreement, the <a href=\"https:\/\/maraz.es\/en\/share-purchase-agreement-spa-key-negotiation-points\/\"><strong>SPA (Share Purchase Agreement)<\/strong><\/a>, which is where the earn-out acquires legal force together with the other price and protection clauses.<\/p>\n<h3>Information, review and dispute resolution<\/h3>\n<p><strong>If the seller does not have sufficient access to the relevant financial information, the conflict is practically sown from day one.<\/strong> That is why it is advisable to regulate the delivery of reporting, review periods, supporting documentation and the procedure for challenging the calculation.<\/p>\n<p><strong>It is also advisable to provide from the outset a mechanism for resolving purely accounting disputes through an independent expert<\/strong>. Experience shows that many earn-out disputes are not legally complex; they are, above all, disputes about figures, adjustment criteria and calculation perimeters.<\/p>\n<h2><strong>The earn-out pursues several objectives:<\/strong><\/h2>\n<ol>\n<li><strong>Aligning interests:<\/strong> By linking part of the purchase price to the company&#8217;s future performance, the seller has an incentive to keep contributing to the success of the business after the sale, which also benefits the buyer.<\/li>\n<li><strong>Mitigating risk:<\/strong> The buyer will only pay additional amounts if the company meets certain pre-established targets, reducing the risk of paying for expectations that do not materialise.<\/li>\n<li><strong>Managing expectations:<\/strong> This mechanism allows the seller to see a clear path to receiving additional payments based on the company&#8217;s future performance, which can facilitate negotiations.<\/li>\n<li><strong>Closing valuation gaps:<\/strong> For example, if the seller values the company at \u20ac150 million and the buyer is only willing to pay \u20ac120 million, an earn-out can serve as a bridge to cover the \u20ac30 million difference, depending on the achievement of future targets.<\/li>\n<\/ol>\n<p>It works on the basis of predefined performance indicators, such as revenue or, more usually, EBITDA or Free Cash Flow.<\/p>\n<p><strong><em>A worked example:<\/em><\/strong><\/p>\n<p><em>Imagine a company whose seller aspires to a valuation of \u20ac150 million, while the buyer is only willing to recognise \u20ac120 million at closing because it considers that part of the expected growth still has to be proven.<\/em><\/p>\n<p><em>A reasonable solution could be to agree a fixed price of \u20ac120 million and an additional earn-out of up to \u20ac30 million, conditional on meeting certain EBITDA, gross margin or commercial growth targets over the following two financial years.<\/em><\/p>\n<p><em>If the results are fully achieved, the seller will receive the entire variable tranche. If they are only partially achieved, it will receive the proportional part provided for in the formula. If they are not achieved, the buyer will have avoided paying from day one for value that ultimately did not consolidate.<\/em><\/p>\n<p><em>That is, in essence, the function of the earn-out: not to eliminate uncertainty, but to distribute it in a negotiated way.<\/em><\/p>\n<h2><strong>Advantages and disadvantages of the earn-out:<\/strong><\/h2>\n<h3><strong>For the buyer<\/strong><\/h3>\n<p><strong>Advantages:<\/strong><\/p>\n<ul>\n<li>It reduces the initial outlay.<\/li>\n<li>It minimises risk by linking payments to future performance.<\/li>\n<li>It ties the seller to a smooth transition of ownership and makes the seller cooperate with the buyer after the transaction.<\/li>\n<\/ul>\n<p><strong>Disadvantages:<\/strong><\/p>\n<ul>\n<li>It can complicate the accounting.<\/li>\n<li>It hinders the integration of the business if independent metrics are needed.<\/li>\n<\/ul>\n<h3><strong>For the seller:<\/strong><\/h3>\n<p><strong>Advantages:<\/strong><\/p>\n<ul>\n<li>It makes it possible to obtain a higher price if the business plan on which the earn-out was set is achieved.<\/li>\n<\/ul>\n<p><strong>Disadvantages:<\/strong><\/p>\n<ul>\n<li>Risk of not receiving additional payments if the buyer controls the calculations or does not invest adequately in the business.<\/li>\n<\/ul>\n<h2>Conclusion<\/h2>\n<p><strong>The earn-out remains one of the most useful tools for closing M&amp;A transactions when buyer and seller do not fully agree on the price. It makes it possible to share risk, bring valuations closer, align incentives and unblock transactions which, with a purely fixed structure, would probably never be signed.<\/strong><\/p>\n<p>But precisely for that reason it demands rigour. It is not enough to agree that part of the price will depend on the future performance of the business. It is necessary to define precisely what is measured, how it is measured, for how long, who controls the variables that affect the result and what will happen if a dispute arises.<\/p>\n<p>Ultimately, the quality of an earn-out is measured not by its ability to close the deal, but by its ability to keep working once the deal has closed.<\/p>\n<p>The earn-out should not be seen as a standard solution, but as a strategic piece within the overall architecture of the transaction. Because in M&amp;A, value is often lost not in the initial valuation, but in the poor structuring of price and risk.<\/p>\n<p><strong>At Maraz Corporate Finance we are <a href=\"https:\/\/maraz.es\/en\/mergers-acquisitions\/\">experts in transactions and company sales (M&amp;A)<\/a> and we coordinate the <a href=\"https:\/\/maraz.es\/en\/financial-due-diligence\/\">due diligence<\/a> and the structuring of the price for a successful sale. If you are preparing a transaction and want to structure the earn-out properly, <a href=\"https:\/\/maraz.es\/en\/contact\/\">contact our team<\/a>.<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/www.linkedin.com\/in\/javierderojas\/\" target=\"_blank\" rel=\"noopener\"><span style=\"color: #333399;\"><strong>Javier de Rojas Roca de Togores<\/strong><\/span><\/a><\/p>\n<p><span style=\"color: #333399;\"><strong>Partner &#8211; Maraz Corporate Finance<\/strong><\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><em>Frequently asked questions about earn-outs<\/em><\/h2>\n<h3><em><strong>What is an earn-out in a company sale?<\/strong><\/em><\/h3>\n<p><em>It is a contingent price mechanism whereby part of the consideration is not paid at closing but is conditional on the acquired company meeting certain future targets. The price is split into two tranches: a fixed one payable at closing, and a variable one whose payment depends on reaching certain metrics or milestones in a subsequent period. Its purpose is not just to defer payment, but to share risk between buyer and seller when they disagree about the future value of the business.<\/em><\/p>\n<h3><em><strong>Which metric should the earn-out be based on: revenue, EBITDA or cash flow?<\/strong><\/em><\/h3>\n<p><em>It depends on which best reflects the business&#8217;s value creation and how the risk is to be shared. Revenue protects the seller against accounting manipulation, but can incentivise growth at the expense of margin. EBITDA fits the logic of multiples-based valuation, but requires the permitted adjustments to be defined in detail. In growth businesses, it is sometimes better to use operating metrics (ARR, churn, gross margin) or free cash flow. The golden rule: choose the metric that best reflects real value, not the best-known one.<\/em><\/p>\n<h3><em><strong>What risks does an earn-out carry for the seller?<\/strong><\/em><\/h3>\n<p><em>The main one is losing control over the variables that determine payment: after closing, it is the buyer who runs the company and can take decisions (reallocating revenue or costs, changing accounting policies, diverting opportunities to other subsidiaries) that artificially reduce the agreed metric. That is why it is essential to protect the earn-out with operating covenants, access to financial information and a dispute-resolution mechanism through an independent expert. A poorly protected earn-out can end up worthless.<\/em><\/p>\n<h3><em><strong>How long does an earn-out period usually last?<\/strong><\/em><\/h3>\n<p><em>There is no standard term: it should match the real cycle of the business. Too short a period prevents the growth thesis from showing in the numbers; too long a period prolongs uncertainty, complicates integration and sours the relationship between the parties. If value depends on recurring sales or customer acquisition, the horizon will be one thing; if it depends on regulatory or technological milestones, another. The usual range is between one and three financial years, but what matters is that the term has economic logic.<\/em><\/p>\n<h3><em><strong>How are conflicts avoided in an earn-out?<\/strong><\/em><\/h3>\n<p><em>Most conflicts arise not because the business performs badly, but from ambiguous or badly designed clauses. They are avoided by precisely defining what is measured and how, setting a clear and verifiable formula, regulating operating covenants that protect the seller during the accrual period, guaranteeing their access to financial reporting and providing from the outset a mechanism for resolving accounting disputes through an independent expert. In earn-outs, almost everything hinges on the quality of the contract drafting.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The earn-out as a tool for closing transactions In a company sale, the main point of contention usually arises when both parties try to convert the value of the business into a closing price. The seller tends to believe that the price should reflect not only the current reality of the business, but also the [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":2078,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[163],"tags":[],"class_list":["post-4764","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mergers-acquisitions"],"acf":{"team_member_autor":{"ID":1417,"post_author":"3","post_date":"2025-03-17 16:11:58","post_date_gmt":"2025-03-17 15:11:58","post_content":"","post_title":"Javier de Rojas Roca de Togores","post_excerpt":"","post_status":"publish","comment_status":"closed","ping_status":"closed","post_password":"","post_name":"javier-de-rojas-roca-de-togores","to_ping":"","pinged":"","post_modified":"2026-10-07 13:24:42","post_modified_gmt":"2026-10-07 11:24:42","post_content_filtered":"","post_parent":0,"guid":"https:\/\/maraz.es\/?post_type=team_member&#038;p=1417","menu_order":0,"post_type":"team_member","post_mime_type":"","comment_count":"0","filter":"raw"}},"_links":{"self":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts\/4764","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/comments?post=4764"}],"version-history":[{"count":0,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/posts\/4764\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/media\/2078"}],"wp:attachment":[{"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/media?parent=4764"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/categories?post=4764"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/maraz.es\/en\/wp-json\/wp\/v2\/tags?post=4764"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}