Key Considerations In Earn-Out Provisions In Private M&A

An earn-out is a mechanism whereby the parties in an M&A transaction link a portion of the purchase price to the future performance of the target business after closing.

In a mergers and acquisitions transaction, earn-outs can be a double-edged tool for purchasers and sellers when negotiating their purchase agreement. A purchaser and seller may choose to include earn-out provisions when they cannot agree in advance on the value of the target business. This is often done with the intent of bridging the gap between what the purchaser is willing to pay to purchase the business and what the seller agrees to charge as a purchase price.

A similar, but inverse, concept is called a "reverse earn-out", whereby the purchase price is reduced after closing to the extent the target company fails to achieve a certain performance threshold.