Earn-out

An earn-out arrangement is commonly employed in company acquisitions to divide the purchase price into a fixed amount and a variable component. The variable component is determined by reference to measurable criteria such as profit, revenue or EBITDA over a pre-agreed period following completion.

This structure is relevant in that it protects the purchaser against overly optimistic projections by the vendor while affording the vendor the opportunity to realise a higher total consideration in the event of strong performance. In practice, earn-outs are most frequently used in respect of businesses with uncertain future results, such as start-ups or companies in a growth phase.

Key drafting considerations include the precise definition of the performance indicators, the duration of the measurement period and the mechanism for dispute resolution, so as to minimise the risk of subsequent proceedings.