What is an Earn-Out in M&A: How it Works, Clauses and Examples [2026]

An earn-out is a contractual mechanism used in company acquisition transactions (M&A) whereby part of the purchase price is conditional upon achieving certain performance targets of the acquired company during a period following completion. It is, in essence, a variable payment linked to future results.

"The earn-out is a powerful tool for closing transactions that would otherwise not complete. But it is also an inexhaustible source of conflicts if not drafted with surgical precision. In our experience, 60% of post-completion disputes in mid-market M&A relate to the interpretation of earn-out clauses."

— Samuel Navarro, founder of Capittal Transacciones

30–40%

Percentage of mid-market transactions in Europe that include some earn-out component, according to the CMS European M&A Study 2024.

Why an earn-out is used

The earn-out resolves one of the most frequent problems in M&A: the valuation gap between buyer and seller (valuation gap). The seller believes their company is worth more than the buyer is willing to pay at completion. The earn-out allows both parties to share the risk:

• The seller accepts a lower price at completion, but with the possibility of receiving more if the company meets targets.
• The buyer pays a lower price at completion, reducing their risk, and only pays more if results confirm the seller's projections.

Typical situations where earn-out is used

Typical earn-out structure

Price components with earn-out

Total price = Completion price (fixed) + Earn-out (variable)

In the Spanish mid-market, the typical structure is:

• Completion price: 60–80% of estimated total price
• Earn-out: 20–40% of estimated total price
• Period: 1 to 3 years post-completion (most common: 2 years)
• Metrics: EBITDA, turnover, gross margin, client retention or specific KPIs

Numerical example

Company with €2M EBITDA. The seller asks for 6x = €12M. The buyer offers 5x = €10M at completion.

Agreement with earn-out:

• Completion price: €10M
• Earn-out: Up to €2M additional, payable based on:
• If Year 1 EBITDA ≥ €2.2M → payment of €1M
• If Year 2 EBITDA ≥ €2.4M → additional payment of €1M
• Total potential price: €12M (aligned with seller's expectation)

Key earn-out clauses

The drafting of earn-out clauses is critical. A poorly drafted earn-out is an invitation to litigation. The main clauses to negotiate are:

"The most important earn-out clause is post-completion business management. If the buyer can make decisions that affect EBITDA (transfer employees, reassign clients, allocate corporate costs), the seller loses control over their earn-out. Clear perimeters and anti-manipulation protections must be negotiated."

— Samuel Navarro, Capittal Transacciones

Earn-out risks for each party

Risks for the seller

• Loss of control. After completion, the buyer manages the company. They can make operational decisions that harm the earn-out (reorganisations, price changes, staff reallocation).
• Accounting manipulation. The buyer can allocate corporate costs, defer income or accelerate expenses to reduce EBITDA during the earn-out period.
• Scope change. If the buyer merges the company with another, transfers activities or modifies the structure, the earn-out metric loses meaning.
• Non-payment risk. If the buyer has financial difficulties after completion, they may be unable to pay the earn-out. Important to negotiate guarantees (bank guarantee, escrow, parent company guarantee).

Risks for the buyer

• Defensive management by seller. If the seller remains as a manager during the earn-out, they may make short-term decisions (inflate sales, defer investments) to maximise their earn-out at the expense of the long term.
• Integration conflicts. The earn-out limits the buyer's ability to fully integrate the acquired company during the measurement period.
• Final price exceeding value. If targets are met due to exogenous factors (market improvement, exchange rates), the buyer may end up paying more than the company is actually worth on its own merits.

Tax treatment of earn-out in Spain

The tax classification of earn-out is a relevant matter:

• If the seller does NOT remain in the company: The earn-out is taxed as a capital gain, at savings rates (19–30% in personal income tax for individuals), as a complement to the sale price.
• If the seller remains as a manager: The Tax Agency may reclassify part of the earn-out as employment income, subject to marginal personal income tax rates (up to 47–54% depending on autonomous community). It is essential that the earn-out is linked to the sale price and not to the provision of services.

Frequently asked questions about earn-out

What percentage of the price is usually earn-out?

In the Spanish and European mid-market, earn-out typically represents between 10% and 30% of the total transaction price. Percentages above 40% are unusual and usually indicate a very high level of uncertainty about the business. According to the CMS European M&A Study 2024, the average is around 20–25% of the total price.

Is EBITDA or turnover better as an earn-out metric?

It depends on the context. EBITDA is the most common metric because it reflects real profitability, but it is more susceptible to manipulation (the buyer can allocate corporate costs). Turnover is more transparent and difficult to manipulate, but does not reflect profitability. In growth-stage companies (start-ups, scale-ups), turnover is usually more appropriate. In mature companies, EBITDA is the standard.

Can I refuse to accept an earn-out?

Yes, the seller can reject a structure with earn-out. However, in practice, rejecting any variable component may mean accepting a lower completion price or even losing the buyer. The key is to negotiate the earn-out clauses to protect your interests, not to reject it outright if the overall offer is attractive.

What happens if the buyer doesn't pay the earn-out?

If the targets are met and the buyer doesn't pay, the seller has legal action to claim. But litigation is costly and uncertain. That's why it's essential to negotiate payment guarantees: escrow deposit, bank guarantee, guarantee from the buyer's parent company, or early maturity clause if the buyer sells the company during the earn-out period.

Sources and references

• CMS. European M&A Study 2024.
• Argos Index, Epsilon Research. Mid-Market Valuation Multiples, Q4 2024.
• SRS Advogados / Lexology. Earn-out Mechanisms in M&A: Practical Issues and Case Law, 2024.
• AEAT. Binding consultations on earn-out taxation (V0472-22, V1839-23).
• Law 35/2006, on Personal Income Tax, arts. 33–37 (capital gains).

Last updated: March 2026

Need to structure an earn-out in your transaction?

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