Definition
L’earn-out is a mechanism of price supplement allowing the final value of a company to be adjusted after its sale, based on its future performance. Concretely, the saddle receives part of the price closingthen one or more additional payments if the company achieves the set objectives (e.g.: EBITDA, revenue target, customer retention).
Why is earn-out crucial?
- Alignment of interests between the buyer and the saddle after the transaction.
- Reduction of overvaluation risk in an uncertain context.
- Motivational tool for the management remaining in the capital.
- Financial flexibility : THE buyer preserves its cash flow while securing post-deal performance.
Operational issues
- Definition of KPIs : objective, verifiable, non-manipulatable indicators.
- Measuring period (earn-out period): generally 12 to 36 months.
- Calculation and auditability : verification clause by a independent expert.
- Governance clauses : supervise the decisions of the buyer to avoid artificial influence on performance.
- Potential conflicts : earn-outs are among the main sources of post-acquisition disputes.
Earn-out vs. Price Adjustment
| Appearance | Earn-out | Price Adjustment |
|---|---|---|
| Timing of application | After closing | Before or at the time of closing |
| Criteria | Future performance (EBITDA, turnover, margin) | Financial situation (net debt, working capital) |
| Objective | Share risk and value creation | Adjust the price to financial reality |
| Duration | 1 to 3 years | Immediate |
| Main risk | Divergence on post-acquisition management | Divergence on closing accounts |
