Many deals stall on a simple disagreement. The seller believes next year's results will be excellent and wants to be paid for them. The buyer has seen many optimistic plans and will only pay for what is proven. Both may be negotiating in good faith; they just see different futures.

Pay for the future when it arrives

An earn-out splits the price in two: a fixed amount at closing, based on what the buyer is confident about, and a variable amount paid later if the business reaches agreed targets. The seller is paid for the upside it believes in; the buyer pays only if that upside is delivered.

Earn-out paid according to the EBITDA achieved in year two, as a share of the agreed target: nothing below 90%, up to 150 million at 120%. The buyer's and the seller's forecasts sit at different points on the curve. Illustrative deal.

In this structure the buyer expects 95% of the target and would pay 25 million; the seller expects 115% and would receive 125 million. Neither has to accept the other's forecast. The cap at 150 million protects the buyer from paying for growth it financed itself, and the floor at 90% avoids paying for results that are simply the plan.

Design rules that prevent disputes

  • Choose a metric the seller can influence and the buyer cannot easily manipulate. Revenue is simpler to verify; EBITDA is closer to value but depends on cost allocations.
  • Define the accounting in the contract, with worked examples, including how integration costs and group charges are treated.
  • Keep it short. One to three years; beyond that the business has changed too much to measure fairly.
  • Align it with the integration plan. If the buyer plans to merge the business into its own, a stand-alone earn-out will block the synergies.
BS

Bartor S.

Founder

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