An earn-out is the part of the purchase price in an acquisition that is paid only after completion and whose amount depends on the results the business achieves over an agreed period. The construction bridges a difference of view between buyer and seller about value.
Legal basis
An earn-out has no statutory regime and rests entirely on the contract. The general law of obligations applies, and in particular Article 6:248 of the Dutch Civil Code on the supplementary and derogating effect of reasonableness and fairness. That provision does most of the work in earn-out disputes: a buyer who runs the business so that the target cannot possibly be met acts contrary to what the contract reasonably entails. Article 6:23, which treats a condition as fulfilled where the party with an interest in non-fulfilment has prevented it, plays an important part as well.
How it works in practice
The metric is usually turnover, gross margin or EBITDA over one to three years. The further the metric sits from turnover, the more room for argument, because costs and allocations then feed into it. Workable clauses therefore describe the basis of calculation including accounting policies, oblige the buyer to continue the business in the ordinary course, give the seller inspection rights, and provide for binding expert determination of disputes.
Where it goes wrong
The classic source of conflict is integration: the buyer merges the business into an existing site, after which its results can no longer be identified separately. A second is the allocation of management charges and overheads that depress profit. A third is the seller’s departure from management, leaving no influence over the results on which the payment depends.
Related terms
The earn-out belongs with the share transfer, follows due diligence and is often combined with a non-compete clause for the seller.
Would you like an earn-out that does not end in a dispute? Our corporate lawyers draft the clause and the dispute mechanism.
