The short answer
An earn-out is the part of the purchase price that is paid later and only if the company you sold meets agreed targets. For you as a founder it is not a bonus but a price component with default risk. Whether it is paid depends less on the target values than on five points in the contract: the metric, its exact definition, the term, the payout curve and the protective clauses against buyer interference. Added to that is a question many underestimate: who keeps the books after the sale from which the earn-out is calculated?
This article is for founders and shareholders selling their company to a strategic buyer or a financial investor. The full price mechanics with net debt, working capital and locked box are covered in purchase price mechanics: from enterprise value to the amount in your account.
Why buyers offer an earn-out
An earn-out bridges a gap between two valuations. You price in the growth of the coming years, the buyer prices what is proven today. Instead of meeting in the middle, the difference is tied to future results. For the buyer this has two advantages: they pay only for growth that actually happens, and they keep you in the company while the measurement runs.
For you this means the planning risk stays with you after the sale, while decisions increasingly sit with the buyer. That is exactly where most disputes arise.
The five levers in the contract
1. The metric
Options are revenue, gross profit, EBITDA or operational milestones such as a product approval or a major customer. The further down the income statement the metric sits, the more the buyer can influence it: through group allocations, transfer prices, hiring or different accounting. Revenue is therefore usually the more robust choice for you, EBITDA the more attractive one for the buyer.
2. Definition and accounting
"EBITDA" without further detail is not a definition. The contract should state which rules apply, usually the accounting policies before the sale, which costs the buyer may allocate and which not, how transaction and integration costs are treated and how cross-selling revenue with the buyer counts. Ideally with a worked example as an annex.
3. Term and measurement dates
One to three years measured annually is common. The longer the term, the more the company changes under the buyer and the harder it becomes to separate what your business contributed. Also check whether years can be netted: a weak first year should be offset by a strong second one.
4. Payout curve
An all-or-nothing target is risky for you: miss it by one percent and you receive nothing. A linear scale between a floor and a cap is fairer and leads to fewer disputes, because no single booking decides the whole amount.
5. Protective clauses
This is the most important part. Typical provisions are the buyer's obligation to run the business in the ordinary course, an adequate budget for the business plan, a ban on deliberately shifting revenue to other group companies, information and inspection rights for you, and early payment of the earn-out if the buyer resells or merges the company or fundamentally changes the strategy.
Your role after the sale
You often stay on as managing director, but under new rules: approval requirements, group policies, a budget you no longer set. Before signing, clarify which decisions affecting the earn-out result stay with you, such as pricing, hiring and sales budget.
Just as important is the link to your service contract. If the buyer terminates you without cause, the earn-out should not lapse but become payable in full or pro rata. Otherwise the buyer can steer the earn-out through a personnel decision.
What the finance function needs to prepare
The earn-out is calculated from numbers the buyer keeps after the sale. That is why the acquired business needs its own reporting line from day one: its own cost centre or profit centre, monthly reporting exactly per the contract definition and a reconciliation of the numbers with the buyer before the year ends. Whoever only notices at year-end that revenue was booked in another entity ends up arguing about records nobody can cleanly allocate any more.
Preparation also pays off before the sale: a robust plan with traceable assumptions is the basis for realistic earn-out targets. More in the article on exit readiness of the finance function.
An example
Illustrative figures, not client data. An earn-out of €2 million is agreed if EBITDA reaches €3 million in the first year after the sale. The business develops as planned. But the buyer allocates group costs for IT, HR and brand of €400,000 to the company that did not exist before. EBITDA is therefore €2.6 million. With an all-or-nothing target the earn-out is lost entirely. With a rule that new group allocations are excluded from the measurement, it would have been paid in full.
Tax and legal
How and when an earn-out is taxed depends on the structure and on whether you sell privately or through a holding company. Clarify this with your tax advisor before the structure is fixed. The contract itself belongs with a law firm experienced in M&A. This article does not replace legal or tax advice.
How nugrow helps
nugrow prepares the finance side of company sales: planning, data room and the calculation logic behind price and earn-out. After the sale we set up earn-out reporting so the numbers are right before the payout is calculated. More on the page exit preparation.
Discuss an upcoming sale with Sebastian Janus
Frequently asked questions
How large is an earn-out usually?
That depends on how far apart your price expectation and the offer are. More important than the amount is how likely the targets are to be met. For your own decision, model the earn-out on a cautious scenario, not on the plan figure.
Revenue or EBITDA as the basis – which is better for founders?
Revenue is usually safer for sellers because the buyer can influence it less through cost allocations, intra-group charges and accounting choices. Buyers prefer EBITDA because it reflects profitability. If EBITDA is agreed, allocations and accounting rules belong explicitly in the contract.
What happens to the earn-out if the buyer integrates the company?
Without a contractual rule, the result of the acquired business often can no longer be measured separately after integration. Common clauses therefore require separate accounts, or an early payout if the buyer integrates, resells or fundamentally changes the strategy.
What happens if I leave as managing director?
That is governed by the link between the earn-out and your service contract. If the buyer terminates you without cause, the earn-out should not lapse. Without this rule, the buyer can effectively steer the earn-out through a personnel decision.
How are disputes over the earn-out calculation resolved?
A staged process is common: the buyer presents the calculation, the seller has a fixed period to object with access to the records, and then an expert, usually an auditor, decides bindingly on the disputed items.
Further reading
- Purchase price mechanics: from enterprise value to the amount in your account
- Exit readiness: preparing the finance function for a sale
- Glossary: earn-out
- Glossary: share purchase agreement
Sources and status
Based on earn-out provisions common in German company sales and our own mandate experience in exit preparation and post-merger integration. The example is illustrative. Status: September 2026.
