Earn-Out
A contingent payment structure in M&A where the seller receives additional consideration if the acquired business achieves specified post-closing performance milestones.
Earn-outs bridge valuation gaps between buyers and sellers. When a seller believes the business will outperform the buyer's conservative projections, an earn-out allows the seller to participate in that upside. The buyer pays a lower fixed price at closing and makes additional payments if the business hits revenue, EBITDA, or operational milestones in the 1-3 years post-closing.
Earn-out disputes are among the most litigated post-close M&A issues. The earn-out definition — which metrics trigger payment, how they are calculated, and what accounting standards apply — must be drafted with precision. Common disputes arise over revenue recognition timing, the buyer's integration decisions that affect earn-out metrics, and calculation methodology.
Document intelligence tools that can extract earn-out provisions and their calculation methodology help acquirers verify that their post-close operating decisions remain consistent with earn-out obligations.
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