The inclusion of an earn-out clause in a purchase agreement can
be a useful tool to help bridge the valuation gap between buyer and
seller. Broadly speaking, an earn-out ties a portion of the
purchase price to the performance of the business following the
acquisition, which the seller can "earn" by meeting
post-closing performance targets. According to the American Bar
Association's 2014 Canadian Private Target Mergers &
Acquisitions Deal Points Study (the 2014 ABA
Study), earn-out clauses were present in 25% of the
transactions surveyed, a slight increase from 21% in the American
Bar Association's 2012 study and a significant increase from 3%
in its 2010 study.
Acting as a form of acquisition currency, a well-crafted
earn-out clause can be attractive to both the buyer and seller. It
provides the seller the opportunity to potentially achieve a higher
sale price, while providing comfort to the buyer that it will only
pay for the seller's provable or safe earnings on
