Glossary · Deal structure

Earn-out

An earn-out is a deferred payment the buyer owes the seller if the business hits pre-agreed targets after closing: typically 15-30% of the deal price over 1-3 years.

Definition

Earn-outs bridge the valuation gap between a seller (who asks a high price on future growth) and a buyer (who refuses to pay for growth that hasn't happened yet). In the Benelux, earn-outs feature in roughly 35-45% of SME deals under €25m, especially in service businesses, young software products, and sectors with strong owner-dependency.

The structure can be based on revenue, EBITDA, gross margin, or customer retention. EBITDA-based is the most common but also the most manipulable by the buyer post-closing: the seller must therefore be contractually protected against "EBITDA erosion" through cost reallocation, transfer pricing, or policy changes. Duration is usually 12, 24, or 36 months; beyond that the seller loses control of the outcome.

Worked example

A Brussels marketing agency is sold for a total price of €3.5m. Structure: €2.5m at closing, €1.0m earn-out spread over 2 years: paid if EBITDA in year 1 is at least €420k (50%) and in year 2 at least €450k (50%). If year-1 EBITDA only reaches €380k, the seller receives a pro-rata share (in this example €425k instead of €500k for year 1, linear sliding scale). Total earn-out in this case ranges from €0 to €1.0m.

When it matters

Most relevant when a large share of value depends on customers / contracts held by the owner, or in growth stories where the track-record is too short to justify a full multiple. Risk for sellers: earn-outs are the subject of post-closing dispute in 30-40% of cases. Protect yourself with (a) clearly measurable KPIs, (b) anti-manipulation clauses, (c) a veto on major accounting decisions during the earn-out period.

Read: share purchase vs asset deal: tax impact

Frequently asked

How large is a typical earn-out as a percentage of deal price?: 15-30% of total deal price is standard in Benelux SME deals. Above 40% the structure becomes risky for the seller: the buyer then carries little downside.
What are the pitfalls for the seller?: EBITDA erosion via buyer cost reallocation, departure of key people, policy changes that depress short-term results, and weak KPI measurability. Contractual anti-manipulation clauses are essential.
Does an earn-out always have to be EBITDA-based?: No. Revenue, gross margin, or customer retention are less manipulable but offer the seller less downside protection. EBITDA remains the most common choice: provided it's contractually well-protected.
Is an earn-out more tax-efficient than a fixed price?: Depends on your situation. In Belgium, earn-outs are often favourable for spreading capital-gains tax in asset deals; less so in share deals. Always have a tax advisor validate this before signing the LOI.

Related terms

EBITDA- EBITDA is earnings before interest, taxes, depreciation, and amortization: the cash-flow proxy on which…
Letter of Intent (LOI)- A Letter of Intent is a typically non-binding term sheet capturing the headline commercial…

Definition

Worked example

When it matters

Frequently asked

How large is a typical earn-out as a percentage of deal price?

15-30% of total deal price is standard in Benelux SME deals. Above 40% the structure becomes risky for the seller: the buyer then carries little downside.

What are the pitfalls for the seller?

EBITDA erosion via buyer cost reallocation, departure of key people, policy changes that depress short-term results, and weak KPI measurability. Contractual anti-manipulation clauses are essential.

Does an earn-out always have to be EBITDA-based?

No. Revenue, gross margin, or customer retention are less manipulable but offer the seller less downside protection. EBITDA remains the most common choice: provided it's contractually well-protected.

Is an earn-out more tax-efficient than a fixed price?

Depends on your situation. In Belgium, earn-outs are often favourable for spreading capital-gains tax in asset deals; less so in share deals. Always have a tax advisor validate this before signing the LOI.