The earn-out is the contractual mechanism by which part of the purchase price is paid on a deferred basis conditional on achieving measurable objectives in the 12-36 months following closing. It is typically used when there is a valuation gap between seller (with expectations on future performance) and buyer (who wants to confirm them before paying), or when the seller-entrepreneur remains operationally involved in post-closing transition. It is a powerful tool — it can save otherwise dead deals — but it is also the source of 60% of post-closing disputes in the Italian mid-market. Structuring it poorly almost certainly means arbitration or litigation within 18-30 months.
Negotiation best practice begins with the choice of earn-out metric. The three typical options — revenues, EBITDA, EBIT — have different trade-offs. Revenues is the simplest metric to measure and least manipulable by the buyer (it’s hard to fake revenue), but it’s also the least aligned with real value creation (the buyer could subsidize revenues by cutting margins). EBITDA is the metric most aligned with value but more manipulable (corporate cost allocations, intercompany transfer pricing, reclassifications of extraordinary items). EBIT includes depreciation/amortization and is even more sensitive to accounting policies. For the mid-market, the robust choice is typically EBITDA with clearly specified perimeter and contractual anti-manipulation protections.
Anti-manipulation protections are the heart of fair earn-out structure. The seller must negotiate: operational ring-fencing of the target company during the earn-out period (no merging with other buyer activities that dilute the metric), contractual prohibition of strategic cost cuts during the period (no key management layoffs, no destructive renegotiations of commercial contracts), investment commitment (capex and marketing at historical levels as minimum), informational transparency (monthly reporting with sufficient detail to verify the metric), rapid arbitration in case of dispute (expert determination clause, not ordinary litigation).
Earn-out duration and sizing must be calibrated carefully. Earn-outs too long (over 36 months) become de facto options — the seller mentally exits and the buyer finds a thousand ways to reduce payout. Earn-outs too short (under 12 months) don’t give time to prove performance and generate perimeter disputes. Sizing: earn-out should weigh 15-30% of total price for the mid-market; over 35% means the seller has sold the company accepting to keep selling it for another 2-3 years — structural imbalance that always becomes a source of conflict. For deals under 20 million euros, the optimal earn-out is 20% of price, 18-24 months, on EBITDA with ring-fencing.
