Earn-Out in M&A: How It Works and How to Protect the Seller

An earn-out is part of the purchase price that the buyer pays after closing, and only if the business reaches agreed targets, most often EBITDA or revenue. It bridges a gap between what the seller believes the company is worth and what the buyer is ready to pay today. Earn-outs are common: in the CMS European M&A Study, they appeared in 27% of the European deals reviewed for 2025, the highest share since the study began. Periods typically run one to three years. Because the buyer controls the company after closing, the seller's protection depends mainly on how the earn-out is defined in the contract, and on the buyer's ability to pay.

What an earn-out is for

Buyer and seller often disagree about the future. The seller expects a new contract to start paying, a product line to keep growing or a weak year to be followed by recovery. The buyer, who carries the risk once the deal closes, is reluctant to pay today for results that have not happened yet.

An earn-out settles this disagreement by making part of the price conditional. If the future the seller describes materialises, the seller is paid for it. If it does not, the buyer has not overpaid. Earn-outs are also used to keep the seller involved during a transition, and to retain key managers who receive part of the earn-out.

How common earn-outs are in Europe

The CMS European M&A Study, which reviews hundreds of transactions advised by the law firm every year, tracks how often earn-outs are used:

Source: CMS European M&A Study 2025 and 2026.

Earn-outs become more frequent when markets are uncertain and valuation gaps are wide. They are also especially common in growing companies, in technology and services, and in deals where the seller stays in management after the sale.

How an earn-out is built

Every earn-out answers the same questions:

• How much of the price is conditional. Usually a minority of the total; 10% to 30% is a common reference range, though it varies by deal. The larger the conditional part, the more the seller depends on decisions the buyer will make.
• Which metric. EBITDA, revenue, gross margin, net income, or a non-financial milestone.
• Over what period. Usually one to three years after closing.
• How the payment is calculated. All-or-nothing thresholds, a sliding scale between a floor and a target, or a share of results above a base.
• Cap. The maximum the seller can receive.
• Timing. Annual payments or a single payment at the end of the period.

A worked example

A buyer values a company at €18 million on its current EBITDA of €4 million. The seller expects EBITDA to reach €5 million within two years and wants €22 million. They agree on €18 million at closing and up to €4 million as an earn-out over two years:

If year 1 EBITDA is €4.3 million, the seller receives 60% of the first payment, €1.2 million. If year 2 reaches €5.0 million, the seller receives the full €2.0 million. Total price: €21.2 million. A sliding scale avoids the all-or-nothing cliff, where missing a target by €10,000 costs the seller the entire payment.

Illustrative figures.

Choosing the metric

EBITDA is the most common metric in European earn-outs, but it is also the one most often disputed. If EBITDA is used, the contract should specify the accounting policies, exclude integration costs and group charges, and include a worked example of the calculation.

How the seller can protect the earn-out

After closing, the buyer controls the company: budgets, prices, staff, investment. The seller's protection therefore rests mainly on the contract, and on the buyer's financial strength to honour it.

• Precise definitions. Formulas, accounting policies and worked examples for every metric, attached to the agreement.
• An agreed business plan that the buyer cannot materially change without consent during the earn-out period, or at least an obligation to run the business in the ordinary course.
• Separate accounts. If the company is merged into the buyer's group, its results must still be measurable.
• Information rights. Regular reporting during the period and access to the data behind the calculation.
• Independent expert. An accountant named in advance to settle disputes about the calculation quickly.
• Acceleration. If the buyer resells the company or the business during the earn-out period, or breaches its obligations, the earn-out becomes payable in full.
• Payment security. An escrow account, or a guarantee from the buyer's parent company or bank, especially if the buyer is an acquisition vehicle with no other assets.

What the buyer will ask for

• Freedom to integrate and run the business according to its own strategy.
• The right to set off seller liabilities, for example warranty claims, against earn-out payments.
• Leaver provisions if the seller stays as a manager: leaving early, or being dismissed for cause, can reduce or cancel the earn-out.
• A cap on the total payment and, sometimes, a single payment at the end rather than annual instalments.

Each of these is negotiable. A seller who is leaving on closing day should resist leaver provisions; a seller who stays should insist that dismissal without cause does not affect the earn-out.

Tax and the advisor's fee

Tax treatment needs attention from the start. In several jurisdictions, if the seller stays in the company as an employee or director, the tax authority may treat earn-out payments as salary rather than as sale proceeds, which can mean a higher tax rate. Structuring the earn-out clearly as part of the purchase price, separate from any employment terms, reduces this risk. Advice from a tax specialist in the relevant country is essential.

Check also how your M&A advisor's success fee treats the earn-out. About half of European advisors expect their full fee at closing, including on earn-out amounts the seller may never receive. Paying the fee on the earn-out only when the earn-out is actually paid is a reasonable request.

Earn-out or another way to defer the price

An earn-out is one of several ways to pay part of the price later. They solve different problems:

The key difference: a vendor loan or an escrow is a fixed amount the seller expects to receive, while an earn-out is genuinely uncertain. If the buyer simply lacks the cash to pay the full price at closing, a vendor loan is usually the more honest structure. An earn-out should be used only when the disagreement is about the future of the business.

How earn-out disputes usually start

Earn-out disagreements are among the most frequent post-closing disputes in M&A. Most follow a few familiar patterns.

Cost allocation. After closing, the buyer charges the company a management fee, group IT costs or a share of head-office expenses. EBITDA falls below the target, although the business itself performs as planned.

Strategic changes. The buyer moves the company's best client to another group entity, discontinues a product line or redirects investment. Revenue in the company falls, while the group as a whole gains.

Accounting changes. New accounting policies, such as different provisions for bad debts or a different treatment of revenue or capitalised costs, reduce the result used for the calculation. A change in depreciation does not by itself affect EBITDA, but it does affect EBIT or net income if one of those is the metric.

Integration. The company is merged into a larger unit, and its results are no longer reported separately. Measuring the earn-out becomes a matter of estimation.

Each of these risks can be reduced in the contract: exclusions for group charges, a covenant not to divert clients or business, a fixed set of accounting policies, and an obligation to keep separate accounts until the end of the earn-out period. The worked example of the calculation attached to the agreement is often what settles a disagreement before it reaches an expert or a court.

When an earn-out makes sense, and when it does not

It works when the valuation gap comes from a specific, measurable future event; when the seller stays involved and can influence the result; when the business will remain identifiable inside the buyer's group; and when the buyer is financially solid.

It works poorly when the seller leaves on closing day; when the targets depend mostly on decisions the buyer will make; when the company will be fully merged and its results will be hard to separate; or when a large share of the price is conditional. In these cases, a lower fixed price, a vendor loan or a retained minority stake can be better alternatives.

Questions and answers

Sources

• CMS, European M&A Study 2026
• CMS, European M&A Study 2025
• NNDKP, Earn-outs in M&A
• Price Bailey, Earn-out
• Firmex, European M&A Fee Guide 2023-24