Earn-out metrics after closing: identifying and limiting result manipulation

The parties should first identify the economic development that is meant to trigger the additional payment. Revenue measures sales performance, EBITDA measures operating earnings and a milestone measures a specifically described event. Each metric needs a period, threshold, formula and rule for partial achievement.

An earnings metric also requires the parties to specify the accounting methods. Austrian annual accounts operate within the statutory framework of sections 195 and 201 of the Austrian Commercial Code, the UGB. The agreement may refer to that framework, define individual items in more detail or provide for agreed adjustments. It should clearly distinguish the statutory annual accounts from the contractual purchase price calculation.

A metric remains unclear if terms such as exceptional expenses, sustainable earnings or comparable costs are left without examples and boundaries. The review of management accounts and quality of earnings provides important preparation, but it does not replace a contractual definition.

Result manipulation can arise from ordinary business decisions. An order is invoiced earlier or later, a marketing measure is brought forward, a group company changes an internal charge or an investment is postponed. Each measure may have a business rationale. For the earn-out calculation, the question is whether the agreed rule presents the relevant period and metric fairly.

The clause should therefore state how revenue, provisions, depreciation, bonus payments, one-off items and intra-group charges are treated. A change in accounting or valuation method also needs a rule. The parties may require the method to remain unchanged, adjust the figure to the previous practice or use a separate reconciliation. Their choice should be shown with figures.

Under section 914 of the Austrian General Civil Code, the parties’ intention and the requirements of good faith guide contractual interpretation. Precise documentation therefore serves two purposes: it makes the economic agreement understandable and reduces room for later interpretation. A general duty to operate the business properly is rarely enough.

The buyer generally needs to develop the business after closing. An earn-out clause should therefore preserve commercial decision-making while distinguishing legitimate decisions from targeted influence on the earn-out metric.

A workable clause can require the business to be run in line with its ordinary plan and with appropriate commercial care, unless objective reasons justify a change. It can also address group companies, internal charges, the transfer of customer orders, product discontinuation and material investment. Necessary restructuring should trigger notice with a reasoned explanation.

The rule should cover integration into a group structure. Clear allocation rules are then needed for shared costs, central services, financing and sales. A blanket ban on any change in earnings would be impractical, while an entirely free hand for the buyer would undermine the price agreement.

Control starts with a fixed accounting process. The buyer delivers the calculation together with the profit and loss statement, a reconciliation to the contractual metric and the key supporting records. The seller receives a reasonable period for objections. The parties can then separate undisputed items from questions that require technical review.

The information right should cover the data needed for the metric and its adjustments. Depending on the model, this may include ledgers, debtor lists, contracts, cost allocations, plan-versus-actual comparisons and records of exceptional transactions. The seller does not need every internal document. The scope should track the calculation.

The agreement may provide for review by an independent auditor or another suitably qualified expert. It should state who appoints the expert, which questions may be submitted and how costs are allocated. The post on completion conditions in an acquisition shows how evidence and deadlines can be built into transaction documents before closing.

The dispute process should separate a calculation dispute from a legal dispute. An independent expert determiner can calculate the metric where the parties disagree about figures, allocations or valuation methods. The expert should be bound by the contractual definitions and deal only with the disputed points.

Legal questions remain for the agreed court or arbitral tribunal. These may include whether a management measure breached a protective duty or how a clause must be interpreted. The process should specify objection periods, records, the scope of review, the decision date and the binding effect of the determination.

The agreement should also state which amount is payable while the dispute continues. Options include paying the undisputed part, making a provisional calculation and correcting it later. A purchase price holdback is different. It normally secures open risks or claims, while the earn-out calculation determines the variable part of the purchase price.