Italian Earn-Outs: Interest Alignment or Disguised Tax Trick?

Updated on 1 June 2026

Italian earn-outs are commonly presented as “alignment of interests” instruments. The reality is more nuanced: most Italian mid-market earn-outs structurally disadvantage sellers through four recurring problems — wrong metric selection, missing conduct covenants, wrong measurement period, and presumed tax optimisation that often doesn’t survive scrutiny. This article argues that Italian earn-outs are often “alignment of interests” in marketing language but “tax disguise with downside skew” in actual practice.

The thesis

An earn-out is “alignment of interests” only when seller and buyer have equivalent control over the variable that determines earn-out value. In Italian mid-market practice, buyer typically retains full operational control while seller retains only contractual claim to performance-based payment. This asymmetry transforms earn-out from alignment instrument into structural seller disadvantage with rhetorical cover.

Knot 1 — The wrong metric

Italian earn-outs typically use EBITDA as metric. EBITDA is buyer-controllable through: accounting policy changes (depreciation methods, provisions), capex deferrals (delaying investment depresses period EBITDA), transfer pricing on inter-company transactions (post-acquisition group structure), one-off allocations (restructuring charges, integration costs allocated to target). Pattern: buyer can reduce EBITDA 10-25% through legitimate accounting decisions without changing underlying business performance.

Better metrics for true alignment: cash flow (harder to manipulate than EBITDA), revenue (less subject to accounting policy), specific operational metrics (customer retention, market share) where seller has genuine influence.

Knot 2 — The absence of conduct covenants

Italian earn-out SPAs typically include extensive financial protections but inadequate conduct covenants — protections against buyer-side operational decisions that depress earn-out metrics. Missing or weak protections: management continuity preservation, accounting standards preservation, capex commitment maintenance, structural decisions (M&A, reorganisation) requiring seller consent.

Italian legal tradition focuses on outcome-based remedies (damages calculation post-event) rather than conduct prevention. Pattern: better US/UK SPA precedents include explicit “good faith and fair dealing” covenants with specific operational standards — rare in Italian practice. Seller’s earn-out becomes vulnerable to buyer’s “legitimate business decisions” that legitimately depress metrics.

Knot 3 — The wrong period

Italian earn-outs typically span 12-24 months. This period is structurally problematic because: integration phase (months 1-12) often produces operational disruption depressing metrics regardless of underlying business strength; insufficient time for value creation to materialise; insufficient time for organisational stability post-integration. Pattern: seller’s earn-out is measured during exactly the period when metrics are most distorted by post-acquisition dynamics.

Better period structures: 24-36 months with integration buffer (months 1-6 excluded), milestone-based payments tied to specific operational achievements rather than annual cliffs.

Knot 4 — The (presumed) tax optimisation

Italian sellers often justify earn-out structures through tax deferral benefits: variable portion taxed when received, allowing income spreading. The argument has merit but is over-claimed. Reality: Italian seller PEX regime makes share-deal at full price 95% tax-exempt for qualifying corporate sellers — the tax benefit of earn-out spreading is marginal compared to PEX savings on all-cash deal. Pattern: tax optimisation justification often used to rationalise structurally disadvantageous earn-out terms that would not otherwise be accepted.

Conclusion

Italian earn-outs are not inherently bad instruments — but the typical Italian mid-market implementation favours buyers structurally. Sellers accepting standard earn-out templates without negotiating the four knots above transfer 15-30% of earn-out value to buyers through structural advantage rather than performance dynamics.

The remedy is not avoiding earn-outs but negotiating them properly: better metrics (cash flow over EBITDA), explicit conduct covenants (US/UK-style operational protections), longer periods with integration buffers, honest tax analysis comparing earn-out vs all-cash post-tax outcomes. With proper negotiation, earn-outs can become genuine alignment instruments. Without proper negotiation, they remain seller disadvantages dressed in alignment rhetoric.

Frequently asked questions

What percentage of price is reasonable to structure as earn-out?

20-35% maximum for Italian mid-market deals. Higher percentages structurally favour buyer through control asymmetry. Sellers structurally weakened above 35% earn-out percentage.

Can earn-out include minimum floor for seller protection?

Yes, increasingly common 2024-2025. Floor structure: minimum 30-50% of target earn-out paid regardless of achievement, balance variable based on actual performance. Reduces seller downside risk while preserving alignment incentive.

How are force majeure cases handled during earn-out period?

Critical SPA clauses: explicit force majeure exclusions from earn-out target measurement, definition of qualifying events, equitable adjustment mechanisms. Pattern: well-structured SPAs include explicit material adverse change provisions affecting earn-out calculations.

What happens if buyer sells target during earn-out period?

Critical “change of control” clause: accelerated full earn-out payment, OR transfer of earn-out obligation to new buyer with seller acceptance. Without this clause, earn-out can be effectively destroyed by post-closing M&A activity. Always negotiate.

How to choose between arbitration and ordinary court for earn-out disputes?

Arbitration generally preferable: faster (12-18 months vs 3-5 years), specialised arbitrators with M&A expertise, confidentiality preservation. Specify arbitration in SPA with Italian Arbitration Association (Camera Arbitrale) or international institutions (ICC, LCIA) depending on deal sophistication.