What is an earn-out?
In an earn-out, part of the purchase price is made dependent on future metrics – e.g. revenue, EBITDA or project completions. This bridges valuation gaps between seller and buyer.
Benefits for both sides
For buyer: risk reduction, payment on proven performance. For seller: higher total price possible if targets are met. Especially relevant for growth companies with uncertainty in projections.
Risks and contract design
Critical: definition of metrics, buyer influence on the business, term. Without clear rules, conflicts arise. Experienced M&A advisors and lawyers structure earn-outs fairly for both sides.