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Purchase price & earn-out

Earn-out in a company acquisition: variable purchase price, metric and protective clauses

How the earn-out as a variable part of the purchase price bridges the valuation gap: metrics, risks from the influence of the buyer and protective clauses for the seller.

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BRANDAUER Rechtsanwälte

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17 June 2026 · Mag. Bernhard Brandauer, Rechtsanwalt

The earn-out is a variable part of the purchase price that depends on the future development of the company. Instead of paying a fixed amount, the parties agree that a part of the price flows only when the company reaches certain targets after closing. In this way a gap between the price expectations of buyer and seller can be bridged.

This post explains how an earn-out works, which metrics are common and which risks it carries. The focus is on the dispute over the calculation, the influence of the buyer on the management after closing and the protective clauses that secure the seller.

From a lawyer perspective the earn-out is a double-edged instrument. It solves the valuation problem but creates new points of conflict. Whoever agrees it without clear rules shifts the dispute to the time after closing. How a variable part of the purchase price can be secured through insurance is shown in the post on W&I insurance.

Classify your earn-out

Is your earn-out robustly designed?

Answer one or two questions on the metric and the conduct. You receive an initial classification of whether your variable purchase price holds or whether dispute looms.

Already know you want to get in touch? Go straight to the enquiry form.

01 Question 1

Is the metric of the earn-out clearly and manipulation-proof defined?

Whether EBITDA, revenue or a milestone: the metric must be calculable unambiguously, otherwise a dispute over the payment arises.

All paths at a glance

Overview of all answers.

01

Without a clear metric the earn-out is a source of future dispute.

The most frequent point of dispute in an earn-out is the calculation. Fix which metric is decisive, such as EBITDA or revenue, and how it is precisely determined. Define the accounting and valuation methods so that not each side calculates differently. Our focus page on the purchase price offers more depth.

An unclear metric shifts the dispute to the time after closing, when the seller bargaining power is low. Clarify this question before signing.

02

Metric and conduct are governed, now the fine-tuning matters.

If the metric and the conduct are governed, the earn-out is solidly set up. Watch in addition for an upper and a lower limit, that is a cap and a floor, a clear duration and a rule on dispute resolution by an expert determiner. In this way the variable purchase price remains calculable.

Align the earn-out with the rest of the purchase price structure. How net debt and working capital affect the purchase price is shown in the post on the purchase price adjustment.

03

Without protective clauses the buyer can influence the earn-out payment.

After closing the buyer runs the company. Without protective clauses it can depress the metric, for example by shifting costs or relocating revenue. Agree a duty of proper conduct of the business, information rights of the seller and a dispute resolution by an expert determiner.

Have the protective clauses reviewed before signing. An earn-out without protection shifts the risk to the seller alone.

Function and purpose of the earn-out

Buyer and seller often assess the value of a company differently. The seller counts on a favourable future development, the buyer is more cautious. The earn-out bridges this valuation gap by coupling a part of the purchase price to the occurrence of the development held out by the seller.

Three metrics are common. The EBITDA-based earn-out ties to the operating result, the revenue-based one to turnover and the milestone-based one to the reaching of certain events such as an approval or a major order. Which metric fits depends on the sector and the business model.

The earn-out distributes the risk of the future development. If the expected development occurs, the seller receives the full price. If it fails to materialise, the buyer pays less. The concept we explain in the glossary.

Risks and points of conflict

As elegantly as the earn-out closes the valuation gap, so many conflicts can it trigger. The most frequent dispute revolves around the calculation of the metric. Even small differences in accounting or valuation can decide on considerable amounts. Without clear methods each side calculates in its own favour.

In addition comes the influence of the buyer on the management. After closing the buyer runs the company. It can influence the metric, for example by relocating revenue to another group company, by additional costs or by a changed investment policy. These incentives to manipulate are the core of the earn-out risk.

Finally the duration carries a risk. The longer the earn-out period, the greater the uncertainty and the more opportunities for influence. An initial assessment of the risks is provided by our M&A transaction risk profile.

Protective clauses for the seller

So that the earn-out does not become a gamble for the seller, it needs protective clauses. Central is the duty of the buyer to the proper conduct of the business. It prohibits the buyer from running the company during the earn-out period in such a way that the metric is artificially depressed.

In addition come information rights. The seller must be able to follow the development of the metric and obtain insight into the relevant figures. An upper and a lower limit, that is a cap and a floor, limit the risk on both sides and make the variable purchase price calculable.

For the case of conflict a dispute resolution by an expert determiner is advisable. Instead of a lengthy lawsuit an independent expert decides on the disputed calculation. How the purchase price structure is composed overall is shown in the post on the purchase price adjustment via net debt and working capital.

The central building blocks

What matters in the design of the earn-out

These building blocks decide whether the earn-out holds or leads to dispute. Check each one before you sign.

Building blocks of the earn-out with recommended drafting and possible risk
Building block Recommended Possible risk
Metric Unambiguously defined EBITDA or revenue with a clear calculation An unclear metric as a source of dispute
Valuation method Fixed and stable Accounting unchanged over the period A change of method distorts the result
Conduct of business Properly governed Duty of conduct without manipulation A free hand of the buyer depresses the payment
Cap and floor Upper and lower limit A calculable frame for both sides An open amount with high risk
Dispute resolution Expert determiner provided Quick clarification by an independent expert A lengthy lawsuit over the calculation

An earn-out also has tax consequences that can turn out differently depending on the design. A tax accompaniment of the design is advisable.

Caution with vague earn-out clauses: Whoever does not clearly govern the metric, the valuation method and the conduct of the business shifts the dispute to the time after closing, when the seller position is weak. Tax consequences too are often overlooked. Have the earn-out clause reviewed before signing. Booking an initial consultation (72 euro) can quickly bring clarity.

Tax note and embedding in the transaction

An earn-out also raises tax questions. Depending on whether the later payment is classified as a deferred purchase price or as ongoing remuneration, different consequences arise. This classification should be clarified in advance so that the chosen design does not lead to unexpected burdens. A blanket statement is not possible here, the accompaniment by a tax adviser is advisable.

The earn-out moreover does not stand on its own. It is part of a purchase price structure that also comprises an adjustment via net debt and working capital, a liability cap and, where applicable, a W&I insurance. These elements must be aligned with one another.

It is above all after closing that it shows whether the earn-out was well designed. How the integration of the company affects the variable purchase price is shown in the post on post-closing integration.

Frequent questions

Earn-out in a company acquisition.

Which metric is best for an earn-out? +

That depends on the business model. The EBITDA-based earn-out reflects the earning power but can be more easily influenced by cost shifting. The revenue-based earn-out is easier to follow but says little about profitability. Milestones are suitable when a clear event determines the value. Important in any case is an unambiguous calculation.

How does the seller protect itself against manipulation? +

The seller needs a duty of the buyer to the proper conduct of the business, information rights over the metric and a fixed valuation method. An upper and a lower limit limit the risk, and an expert determiner clarifies a dispute over the calculation quickly. Without these clauses the seller bears the risk alone.

How long should an earn-out period last? +

The longer the period, the greater the uncertainty and the more opportunities for influence by the buyer. One to three years is common. A shorter period reduces the room for conflict but must be long enough for the expected development to show. The right duration depends on the business model.

Going deeper

Further topics around the purchase price

Purchase price adjustment via net debt and working capital

How the fixed part of the purchase price is adjusted at closing.

W&I insurance

How the warranties from the purchase contract can be insured.

Post-closing integration

How the integration of the company influences the earn-out.

Purchase price

The focus page on purchase price, adjustment and protection.

Topics
Earn-outPurchase priceEBITDAProtective clausesExpert determiner

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