Earn-out: how does it work in a Dutch business sale?

An earn-out makes part of the purchase price dependent on the results the business achieves after completion. It works well when buyer and seller disagree about value, but it often leads to disputes, because the seller’s money depends on decisions taken by the buyer after the sale.

The seller is confident about the forecast, the buyer is not; instead of arguing about the projection, they let the actual results over one to three years settle it. That closes transactions that would otherwise fail. It is also the weakness: the party now running the business largely controls the figure on which the seller is paid, and Dutch law (Articles 6:248 and 6:23 of the Dutch Civil Code, BW) only offers a backstop.

What must an earn-out clause define?

Four elements decide whether an earn-out works: the metric, the period, the formula and the accounting basis. If one of them is vague, a dispute about the payment is likely.

The metric can be revenue, gross margin, EBITDA or another figure, and each creates different incentives. Revenue is easy to measure but also easy to inflate at the expense of margin. EBITDA is closer to the value of the business but far more open to accounting influence.

The measurement period is usually one to three years. The formula sets how the payment is calculated, including any threshold below which nothing is paid and any cap. The accounting basis states which policies apply, whether they may change, and who prepares the figures.

How can the seller protect the payment?

The seller’s risk is that the buyer depresses the figure, deliberately or simply by running the business its own way. Protection comes from covenants, information rights and a fast dispute mechanism.

Ordinary decisions after completion can lower the result without any bad faith: allocating group overheads to the acquired company, moving a customer to a sister entity, deferring revenue until after the earn-out period, or investing heavily in growth that reduces short-term profit. Agree covenants for the period: no change to accounting policies, arm’s length terms for group transactions, no transfer of customers or contracts out of the entity, and a defined level of investment.

Give the seller information rights, with quarterly figures rather than a single statement at the end, and an audit right. Agree a dispute mechanism: an independent expert who decides within, for example, 30 days, rather than court proceedings two years later.

What does Dutch law add if the contract is silent?

Dutch law offers a backstop, but it is no substitute for careful drafting. Under Article 6:248 BW, an agreement has not only the effects the parties agreed, but also those that follow from the law, custom and reasonableness and fairness (redelijkheid en billijkheid). A buyer who manipulates the outcome can therefore be held liable.

Where the earn-out is structured as a conditional payment, Article 6:23 BW may also help the seller. If the party with an interest in the condition not being met has prevented it from being met, the condition counts as fulfilled, if reasonableness and fairness require this. The reverse rule applies to a party who brings about the condition in its own interest.

Relying on these open standards is expensive and uncertain: the court, usually the commercial division of the district court, weighs all circumstances and the outcome is hard to predict. Treat Articles 6:248 and 6:23 BW as a safety net, not as a plan.

How can the buyer protect itself?

The buyer’s risk is the mirror image: a seller who stays on and manages towards the metric at the expense of the business, for example by chasing revenue that will not repeat or postponing necessary expenditure. Where the seller remains involved, the covenants should run both ways, and the metric should match what the buyer actually cares about.

The buyer should also agree what happens if it sells the business on, or reorganises it, during the earn-out period. The usual solution is to accelerate payment on a defined basis, rather than leaving the clause to operate on an entity that no longer exists in the same form.

What should you check as a seller?

• The metric is defined by a worked numerical example annexed to the agreement.
• The accounting policies are frozen for the earn-out period, including the allocation of group costs.
• You receive periodic figures and have an audit right.
• Covenants prevent customers, contracts or revenue from being moved out of the company.
• Payment is accelerated if the buyer sells or restructures the business.
• Disputes go to an independent expert with a short, fixed timetable.

What should you check as a buyer?

• The threshold is realistic and the payment is capped.
• The metric rewards lasting results, not one-off revenue or postponed costs.
• Covenants bind the seller if the seller stays on as director or employee.
• You keep the freedom to run, integrate or sell the business, with a defined consequence for the earn-out.
• A simpler mechanism, such as a lower fixed price or an unconditional deferred payment, would not achieve the same result with less risk.

What can we do for you with an earn-out?

Our corporate lawyers advise both sellers and buyers on earn-out clauses and the disputes they cause. We can:

• Draft or review the earn-out clause in your share or asset purchase agreement, including the worked example.
• Negotiate covenants, information rights and acceleration on a sale or reorganisation.
• Draft a binding expert determination (bindend advies) clause with a fixed timetable.
• Assess whether the buyer’s conduct breaches Article 6:248 or 6:23 BW once a payment is disputed.
• Conduct the expert procedure or the proceedings before the district court.

Summary

• An earn-out ties part of the price to results after completion and bridges a gap in valuation.
• Define the metric, period, formula and accounting basis precisely, preferably with a worked example.
• The seller needs covenants, information and audit rights, and a fast dispute mechanism.
• Articles 6:248 and 6:23 BW offer a backstop, but they are uncertain and costly to rely on.
• The buyer should agree two-way covenants and what happens on a sale or reorganisation.

Frequently asked questions