What Is an Earn-Out? How It Works, the Risks, and Fair Structuring

An earn-out is the part of the purchase price that is paid only later — and only if the company develops after the sale as agreed.

Instead of a fixed sum at closing, the price splits in two: a secure base amount today, a variable additional amount in the years that follow. It sounds like a fair compromise. In practice, it is the instrument a buyer uses to shift risk onto the seller.

Anyone selling should understand exactly how an earn-out works — before agreeing to an attractive headline figure of which perhaps a third never arrives.

How an earn-out works

The purchase price consists of two parts: a fixed base price paid at closing, and a variable additional price whose amount and timing depend on future business performance.

The link runs through a metric. Most commonly this is future EBITDA, sometimes revenue, occasionally operational figures such as customer numbers or milestones reached. If the company meets the agreed targets within a defined period — typically one to three years — the additional amount is paid. If it falls short, that amount shrinks or disappears entirely.

This is the heart of it: an earn-out is not a bonus on top. It is part of the price that the seller still has to earn.

Why buyers want it — and sellers are wary

An earn-out is, in principle, a buyer's instrument. It reduces the buyer's risk: by paying part only once the promised earnings actually materialise, the buyer cannot overcommit to inflated forecasts.

For the seller, the calculation is reversed. They take on entrepreneurial risk for a period in which they often no longer steer the company. KPMG accordingly classifies earn-out clauses as a means of risk-sharing, Deloitte as a variable purchase-price component that only applies if targets are met.

An earn-out makes sense above all when buyer and seller assess the value differently — for instance because a young, fast-growing business has not yet proven its earning power over several years. The earn-out bridges that gap instead of letting the negotiation fail. For more on why the price is set in the negotiation anyway, see "Strategic buyer or financial investor?".

The three levers that decide fairness

Whether an earn-out is fair depends not on its existence but on three details.

The reference metric. The further down the income statement the metric sits, the easier it is to influence after closing. A revenue-based earn-out is harder to manipulate than one based on EBITDA, into which the new owner can interfere via costs, allocations and investments.

The period. The longer the earn-out runs, the more of the buyer's decisions stand between you and your money. One to two years is manageable; five years is a long time without control.

Your influence. If you stay in management after the sale, you can help shape whether the targets are met. If you leave, your money hangs on decisions others make. Both are possible — they simply have to match the size of the earn-out.

Where it goes wrong in practice

The most common dispute arises because the buyer runs the company differently after closing than the seller expected — and the earn-out targets are missed as a result of the buyer's own decisions.

Here the situation has recently worsened for sellers. Newer case law in the DACH region weights the buyer's entrepreneurial freedom more heavily than an implied duty of loyal cooperation. In concrete terms: if the purchase agreement lacks precise rules, the buyer may largely run the business at their own discretion — even if that jeopardises the additional payment. Vague clauses that rely on general duties of good faith offer little protection.

The conclusion is uncomfortable but clear: an earn-out is only worth as much as the protective clauses explicitly written into the contract. Which management actions are permitted, how the metric is calculated, what information rights you retain, what happens on a resale — all of that must be negotiated, not left to good intentions.

Tax: a point that belongs on the table early

The tax treatment of an earn-out is delicate and belongs in the hands of your tax adviser. The reason: there is a risk that the tax authorities will not recognise the additional amount as a privileged capital gain but as ongoing, more highly taxed income. Whether an earn-out is attractive for you on a net basis is therefore not decided by the gross figure alone. This is context, not tax advice — the structuring in each individual case should be reviewed by tax advisers and lawyers.

When an earn-out makes sense for you

An earn-out is a good tool when it bridges a genuine valuation gap and you retain influence over the outcome. It is a poor one when it merely serves to quote an optically high price, much of which is uncertain.

The sober question is always: how high is the secure base amount — and could I live well with that alone? Everything above it is a matter of negotiation and belongs in a cleanly structured process. What that looks like from preparation to closing is shown in "The process of selling a company".

Selling a company is the most important transaction of an entrepreneur's life. Have it guided independently and discreetly — IGCP Capital Partners. → igcp.at

Frequently Asked Questions

What share of the purchase price does an earn-out usually represent?

That is a matter of negotiation and depends heavily on industry, growth and risk profile — there is no universal percentage. What matters is less the percentage than how reliably the variable part can actually be achieved. A small, well-structured earn-out is better than a large one with vague conditions.

What happens to the earn-out if I leave after the sale?

Then your additional payment depends on decisions others make. That is precisely why the reference metric, the method of calculation and the protective clauses should be clearly fixed in the contract before you agree. Without your own control in the company, the risk rises that targets are missed for reasons you cannot influence.

Is an earn-out a disadvantage for the seller?

It shifts risk from buyer to seller — that is its function. It becomes disadvantageous when the metric is manipulable, the period long and the seller's influence small. It becomes fair through precise clauses and a reference metric that cannot be reduced at will.

Which metric is the best basis for an earn-out?

Tendentially one that the buyer can hardly influence after closing — revenue is more robust than EBITDA, because the latter absorbs the new owner's costs and investment decisions. Which figure fits depends on the business model and is among the most important points of negotiation.