deal-structures
An earnout is contingent consideration: part of the price is paid later if the business hits agreed targets. It bridges a valuation gap when buyer and seller do not share the same view of future earnings.
An earnout is used when the seller’s plan is richer than the buyer will underwrite in cash at closing. Typical metrics: revenue, EBITDA, gross profit, or milestone events (a licence, a renewal, a clinical result). Duration is often one to three years.
Under IFRS 3, contingent consideration is usually recognised at fair value on the acquisition date and then remeasured through profit or loss if it is a financial liability. That accounting is not the commercial debate, but CFOs of buyers need to know it exists.
Who controls the business during the earnout period? Can the buyer integrate, cut the sales force, or change transfer pricing? Is the metric defined as in the QoE? Caps, floors, catch-ups, and acceleration on a second sale all change behaviour. This is why earnouts generate a disproportionate share of post-deal disputes.
Headline €25m, of which €20m at close and €5m if 2027 adjusted EBITDA ≥ €4.5m, linear scale down to zero at €3.8m. Six months after close the buyer merges the target into a sister company and reallocates €0.7m of group overhead onto the earnout P&L. The clause on “ordinary course” and “no actions primarily intended to reduce the earnout” is now the deal.
Buyers like earnouts as risk transfer. Sellers should treat them as option value, not as cash. Strategic buyers who will integrate aggressively are structurally poor earnout counterparties unless the metric is ring-fenced.
A metric that management can no longer see after integration. No dispute expert. No definition of adjusted EBITDA. Using an earnout to hide that the parties never agreed on business valuation.
Earnouts do not fix adverse selection. They can also misalign a management team that is now employed by the buyer.
If you cannot define the earnout metric from a structured earnings object, you cannot administer it. Earnouts belong with the same financial layer as the QoE — otherwise you are litigating a spreadsheet.