An earn-out makes part of the purchase price dependent on the results the business achieves after completion. It is used when buyer and seller cannot agree on value: the seller is confident about the forecast, the buyer is not, and instead of arguing about the projection they agree that the future will settle it.
That is its strength and its weakness. It closes transactions that would otherwise fail, and it is the single most litigated clause in Dutch business sales, because it leaves the seller’s money in the hands of the person now running the business.
Wat muss definéiert ginn
Four elements decide whether an earn-out works. The metric: revenue, gross margin, EBITDA or another figure, each with different incentives. Revenue is easy to measure and easy to inflate at the expense of margin; EBITDA is closer to value and far more open to accounting influence.
The measurement period, usually one to three years. The formula, including any threshold below which nothing is paid and any cap. And the accounting basis: which policies apply, how they may change, and how the figures are prepared and by whom.
Protecting the seller
The seller’s risk is that the buyer, deliberately or simply by running the business its own way, depresses the figure. Ordinary post-completion decisions can do it without any bad faith at all: allocating group overheads to the acquired company, moving a customer to a sister entity, deferring revenue into the period after the earn-out, investing heavily in growth that suppresses short-term profit.
Contractual protection follows from that list. Agree covenants on how the business will be conducted during the period: no change to accounting policies, arm’s length terms for group transactions, no transfer of customers or contracts out of the entity, a defined level of continued investment. Give the seller information rights – periodic figures rather than a single statement at the end – and an audit right. And agree a dispute mechanism: an independent expert with a short timetable, rather than court proceedings two years later.
Dutch law offers a backstop where the contract does not. The requirements of reasonableness and fairness govern the performance of the agreement, and a buyer who manipulates the outcome can be held liable. But relying on that standard is expensive and uncertain; it is a safety net, not a substitute for drafting.
Protecting the buyer
The buyer’s risk is the mirror image: a seller who stays on and manages towards the metric at the expense of the business, chasing revenue that will not repeat or deferring necessary expenditure. Where the seller remains involved, the covenants should run both ways, and the earn-out should be aligned with the metric the buyer actually cares about.
The buyer should also address what happens if it sells the business on, or reorganises it, during the earn-out period – typically by accelerating payment on a defined basis rather than by leaving the clause to operate on an entity that no longer exists in the same form.
Practical drafting points
Define the metric by reference to a worked example annexed to the agreement; a numerical example resolves more disputes than a paragraph of definition. Keep the period short. Set the threshold at a level that is realistically achievable, because an earn-out that everyone privately expects to fail is simply a discount dressed up as a payment. And consider whether a simpler mechanism – a lower fixed price, or deferred consideration without conditions – would achieve the same commercial result with none of the risk.
Rot
We draft and negotiate earn-out arrangements on both sides and act in disputes about their calculation. Please contact Law & More; our corporate lawyers are happy to advise.
