In the polite language of M&A operations, “earn-out” acts as a balancing act. It reassures a buyer who doubts the seller’s projections, and offers the latter the promise of a price aligned with the actual performance of their company. On paper, the idea seems simple, part of the price is paid later, depending on future results, in practice, it is a gray area where everything depends on the details of the agreement.
Because once the company is integrated, the transferring entrepreneur loses control. Control of accounting, recruitment, pricing policies or budgetary priorities passes to the buyer’s camp, and this is where the manipulations begin, often without them formally violating the contract.
When earn-out becomes a power game
An earn-out is the clause that makes and breaks post-deal friendships, without a precise framework, the buyer has dozens of levers to “smooth” performance, shift charges, transfer clients, or charge management fees. The challenge, for the seller, is therefore not to “believe” in the good faith of his buyer, but to legally lock down each sensitive point.
1. Loyalty above all
It all starts with a clause of fair management. It requires the purchaser to administer the company in the ordinary way, without a decision having the effect of artificially reducing the basis for calculating the price supplement. It is not a symbolic clause, it is the one which establishes all the others, and establishes a principle of good faith which can be mobilized in the event of a deviation.
2. EBITDA, but “contractual” version
Then comes the heart of the matter, the definition of the result. You must keep in mind that an “accounting” EBITDA is a sieve. It is necessary to define a “contractual” EBITDA, line by line, restatement by restatement.
Headquarters costs, changes in accounting methods or exceptional income must be listed and neutralized. Without this, the simple decision to charge an intra-group fee can wipe out the seller’s performance.
3. Accounting methods must no longer change
Changing billing or amortization policy is another subtle way to impact performance. A clause of accounting stability requires the methods in force at the time of closing to be retained, unless agreed in writing by the seller. Without this, a simple decision from headquarters can reduce EBITDA without any fault being committed, and therefore attributable.
4. The veto, a survival tool
During the earn-out period, the seller must retain a minimum of power over structuring decisions. This is the object of veto rights such as significant recruitments, heavy investments, marketing campaigns or changes of suppliers. Without this safeguard, the group’s management could artificially inflate the charges to “clean up” the result before the end of the calculation period.
5. Prevent commercial cannibalization
Another point to keep in mind, rapid integrations are often the seller’s worst enemy. A large group can redirect the target’s historical customers to other subsidiaries, modify the commercial policy, or lower prices to regain control of the market. There non-cannibalization clause prohibits these transfers. It requires the acquirer not to divert customers, contracts or teams during the earn-out period.
6. Freeze the perimeter
Another classic lever, merge, split or absorb the company sold to confuse the accounts. There fixed perimeter clause prohibits any structural modification without the seller’s agreement. A partial merger, a team transfer or a line of business sale may be enough to make any performance calculation impossible.
7. See the numbers to understand
Transparency is not a luxury, and the seller must obtain regular reportingmonthly or quarterly, on performance indicators, as well as a right to audit carried out by an independent expert. Without access to figures, it is impossible to detect discrepancies or manipulations in time. And once the period has passed, recourse becomes complicated to operate.
8. Plan to use a third-party expert
Because no deal is safe from disagreement, the contract must provide the intervention of a third-party expert whose decision will be final and binding. This clause, often neglected, avoids plunging into long and uncertain legal procedures. It also makes it possible to quickly resolve technical disputes over the calculation of the additional price, without breaking the relationship between the parties.
9. Neutralize synergies
Large groups often cite synergies to justify rapid integration. However, these synergies, whether they involve cost sharing, merging services, or economies of scale, distort the target result. A neutralization clause requires these effects to be excluded from the calculation of earn-out, so that performance only reflects the scope sold.
10. Provide for the right to reputation
Last reflex, less legal but just as crucial, carefully check the track record of the purchaser. Some have the reputation of never paying earn-outs, others of honoring their commitments. The best-written contracts are no substitute for trust.
A well-designed earn-out aligns more than it divides. Its objective is to preserve trust at a time when information becomes asymmetrical, and the temptation to take control increases.
