Glossary · Legal

Earn-out dispute

An earn-out dispute is a conflict over the calculation or payout of an earn-out: affects 30-40% of Benelux SME earn-out deals, usually triggered by EBITDA erosion, scope shifts or target manipulation.

Definition

The three most common causes: (1) EBITDA erosion: the buyer reallocates holding-company costs onto the acquired business, depressing EBITDA and lowering the earn-out. (2) Scope shift: the buyer decides to make a large investment that disrupts short-term margins, or kills a high-margin product line. (3) Key-people departure: sales staff leave, revenue dips, the seller no longer controls the outcome.

The three contractual protections: (1) "EBITDA bridge": define EBITDA in the SPA per the historical methodology, with an explicit list of what may/may not be re-classed. (2) Veto on major cost or policy changes during the earn-out window. (3) "Reasonable conduct" clause obliging the buyer to operate the acquired business as a standalone for the duration.

When it matters

For every deal with earn-out above 15% of the price. Half of disputes resolve informally; the other half escalate to arbitration (Belgian CEPANI or Dutch NAI) or court: 12-24 months and €50-200k in procedural costs.

Read: earn-out clauses that work

Frequently asked

How often does an earn-out trigger a dispute?: 30-40% in the Benelux. Higher the longer the earn-out runs (24+ months), the larger it is (>30% of price), or the more it relies on EBITDA vs revenue or customer retention.
What is an "EBITDA bridge"?: A detailed SPA clause defining how EBITDA is calculated during the earn-out window, which items may or may not flow in, and what audit rights the seller has.
Should I pick a revenue earn-out instead?: Revenue is less manipulable than EBITDA but gives the seller less protection against cost inflation. Gross margin is a useful middle. In practice EBITDA stays dominant: provided well-protected contractually.
What if the buyer refuses to cooperate on the earn-out audit?: The SPA must include a "books and records" clause granting the seller and their auditor read access to the relevant accounts during the earn-out window. Without it, the seller has no enforcement.

Related terms

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Definition

Frequently asked

How often does an earn-out trigger a dispute?

30-40% in the Benelux. Higher the longer the earn-out runs (24+ months), the larger it is (>30% of price), or the more it relies on EBITDA vs revenue or customer retention.

What is an "EBITDA bridge"?

A detailed SPA clause defining how EBITDA is calculated during the earn-out window, which items may or may not flow in, and what audit rights the seller has.

Should I pick a revenue earn-out instead?

Revenue is less manipulable than EBITDA but gives the seller less protection against cost inflation. Gross margin is a useful middle. In practice EBITDA stays dominant: provided well-protected contractually.

What if the buyer refuses to cooperate on the earn-out audit?

The SPA must include a "books and records" clause granting the seller and their auditor read access to the relevant accounts during the earn-out window. Without it, the seller has no enforcement.