The earn-out is a popular tool in German mid-market M&A to bridge a valuation gap between buyer and seller. Yet what starts as an elegant compromise alarmingly often ends in arbitration. The good news: nearly every earn-out dispute can be prevented through clean clauses and transparent reporting drafted during the contract phase.
Why earn-outs lead to disputes
The root cause is a structural conflict of interest: the seller wants to maximise the variable purchase price, but after closing the buyer controls the business that generates the earn-out metrics. If the buyer makes decisions that compress margins in the short term, the seller sees the bonus erode. Typical points of contention are the definition of the metric, cost allocation, revenue shifts between periods, and whether the buyer must run the business in good faith.
Choosing the right metric
The choice of reference figure determines how prone the earn-out is to manipulation. A revenue-based earn-out is easy to measure but rewards unprofitable growth. An EBITDA-based earn-out better reflects earning power but gives the buyer many levers on the cost side. The further down the income statement the metric sits, the more detailed the contract must be. Define precisely which adjustments are permitted and which group allocations or management fees are excluded.
Protective clauses for the seller
Several mechanisms belong in the contract. An ordinary-course clause obliges the buyer to run the business in the normal course during the earn-out period. Negative covenants prohibit harmful actions such as shifting customers to other group entities. A carefully drafted MAC clause must not be abusable to defeat the earn-out. An acceleration clause makes the earn-out due in full upon a resale or change of control.
Reporting as dispute prevention
The most effective protection against disputes is transparency. Agree on binding quarterly reporting with a detailed derivation of the earn-out metric, audit rights and a clearly defined escalation and arbitration procedure with a named expert. The earn-out accounting must be kept consistent with the accounting principles fixed in the contract from day one, to avoid a later purchase price adjustment dispute. Professional closing support ensures the reporting mechanics are set up cleanly at completion.
FAQ
How long should an earn-out period run? One to three years works well in the mid-market. Longer periods raise the conflict potential as market conditions and integration affect the metrics more strongly.
Should the seller stay in the business? Often yes. Remaining in management preserves the seller's influence over the relevant metrics and reduces the risk of external control.
What happens in a dispute over the metric? An independent expert named in the contract decides bindingly. This is faster and cheaper than court proceedings and should be regulated in detail in advance.
30-Day Implementation Plan
Days 1 to 10: Define the metric with your advisor and set which add-backs and group allocations are included or excluded. Build a sample calculation using historical figures.
Days 11 to 20: Draft the protective clauses, the reporting format and intervals, and the arbitration procedure with an expert.
Days 21 to 30: Stress-test the clauses against realistic scenarios, align the earn-out mechanics with the rest of the purchase agreement and bring in M&A advisory for the final review. See our article on earn-out agreements for more background.