The earn-out is one of the most common tools in European M&A — and one of the most misunderstood. In approximately 40% of earn-out arrangements, sellers receive materially less than the projected additional consideration. The reasons are rarely dramatic. They are structural.

Here is how an earn-out works in theory. You and the buyer disagree on what your business is worth. You think it will earn €2M EBITDA next year. The buyer thinks it will earn €1.5M. Rather than splitting the difference, you agree on a base price reflecting €1.5M and an additional payment — the earn-out — if the business hits €2M or above. Simple. Clean. Logical.

Here is how it works in practice. The buyer takes over. They restructure the cost base. They allocate central overhead to your P&L. They delay decisions that would increase revenue in year one but reduce it in year two. They integrate your sales team into their own. And at the end of the earn-out period, your measured EBITDA — calculated according to the definition in the agreement, which the buyer's lawyers drafted — comes in at €1.48M.

The definition problem

The single most important clause in any earn-out agreement is the definition of the earn-out metric. Most sellers focus on the target number. Almost none focus with sufficient rigour on how that number will be calculated after acquisition.

Post-acquisition, a business operates differently. Costs that did not exist pre-close — management fees, shared service allocations, group insurance, IT charges, legal costs — appear on the P&L. Revenue decisions that were yours to make are now subject to group approval. Customer pricing may be harmonised with the group's pricing. None of this is necessarily improper. All of it affects the earn-out calculation.

Three earn-out structures that actually work

The first is the revenue-based earn-out. Revenue is harder to manipulate than EBITDA because it does not depend on cost allocation decisions made by the new owner. If you have high-visibility recurring revenue, push for a revenue target rather than an EBITDA target. Accept a lower multiple on the earn-out portion in exchange for a cleaner metric.

The second is the short duration. Every additional month of earn-out period is another month in which circumstances can change — management changes, market shifts, integration decisions. The cleanest earn-outs are twelve months or less. Two years is workable. Three years is where most disputes originate.

The third is the operational protection clause. This is the clause your lawyer will push for and the buyer's team will resist. It specifies that the earn-out business will be operated in a manner consistent with its pre-acquisition operating model, without material changes to staffing, customer relationships, or product strategy without seller consent. Getting this clause — in meaningful form, not as vague boilerplate — is the single most important protective measure available to a seller who agrees to an earn-out.

When to accept an earn-out and when to walk

Accept an earn-out when: the metric is revenue or gross profit (not EBITDA), the period is twelve months or less, you retain operational control during the earn-out period, and the base price already represents a fair outcome without the earn-out.

Walk away from an earn-out when: the buyer wants EBITDA as the metric with no operational protection, the period exceeds twenty-four months, the earn-out represents more than 25% of total consideration, or the buyer has a history of earn-out disputes (which your advisor should know and should tell you).