The earn-out is a deferred price mechanism: part of the sale price is not paid at closing but later, depending on the future performance of the company being sold. It helps bridge the gap when seller and buyer cannot agree on valuation, by making part of the price depend on the results actually achieved.
How it is structured
The parties define a reference indicator - turnover, EBITDA, net profit, or operational targets - a measurement period, and a calculation formula. If the targets are met over the agreed period, the additional price component is owed to the seller.
A frequent source of disputes
The earn-out crystallises tensions: the seller, who often stays on operationally, wants to maximise the indicator; the buyer, now in charge, takes management decisions that may affect it. The drafting must therefore be precise about the method of calculation, access to information and the treatment of decisions liable to influence the result.
Drafting the earn-out clause well
The security of an earn-out lies in the precision of its drafting. Several points deserve particular attention:
- The chosen indicator and its calculation method, defined without ambiguity;
- The reference period and the timetable for recording the result;
- The management rules during the earn-out period, to prevent the buyer's decisions from distorting the indicator;
- The seller's access to the accounting information needed to verify the calculation;
- The method for settling disagreements over the amount owed.
The role of escrow
Placing the sums corresponding to the earn-out into escrow secures both parties. The seller is assured that the additional amount will indeed be available if the targets are met; the buyer avoids advancing funds before the due date. The escrow agent releases the sums according to the agreed formula and conditions, without either party being able to dispose of them unilaterally.
Are you planning a deferred price component? Fidens holds the earn-out sums in escrow on a CARPA account and organises their release at the due date.
Frequently asked questions
What is an earn-out?+
It is a deferred component of the sale price, paid after closing and indexed to the future performance of the company being sold. It helps bring the seller's and buyer's positions closer together when they cannot agree on valuation.
Why place earn-out sums in escrow?+
To secure both parties: the seller is assured that the additional amount will be available if the targets are met, and the buyer avoids advancing the funds before the due date. The escrow agent releases the sums according to the agreed formula.
Is the earn-out a source of disputes?+
It can be, because the seller and the buyer have divergent interests in how the company is managed during the measurement period. Precise drafting of the clause and an escrow of the sums markedly reduce this risk.
A transaction to secure?
Fidens sets up the escrow of the price on a CARPA account, under the responsibility of a lawyer.