Earn-out in business sales and acquisitions: What it is and how to negotiate it

You are negotiating the sale of your technical services company in the province of Valencia. The buyer thinks it is worth €600,000. You think it is worth €800,000 because you have growing contracts that are not yet fully reflected in the figures. How do you close that €200,000 gap without anyone losing out? With an earn-out.

The earn-out is one of the most useful — and most dangerous — tools in business sales and acquisitions. Well structured, it unlocks deals that would otherwise never complete. Badly structured, it creates disputes that end up in court.

What exactly is an earn-out?

An earn-out is a deferred payment mechanism in which part of the sale price of the business is linked to the future performance of the business after completion of the transaction. The seller receives an initial payment at completion and the rest only if the business meets certain targets during a subsequent period [1].

Illustrative example: the sale is agreed at a total price of €800,000, of which €600,000 is paid at completion and €200,000 is paid over the following 2 years if the business maintains or exceeds an EBITDA of €120,000 a year.

In SME transactions, the earn-out is used especially when there is a difference between what the seller believes the business is worth and what the buyer is willing to pay upfront.

When does it make sense to use an earn-out?

An earn-out makes sense in four main scenarios:

1. Valuation gap (price gap): Buyer and seller cannot agree on the price. The earn-out lets the seller "prove" with future results that their valuation was right.

2. Growing business: If the business is growing fast and the historical figures do not reflect its real potential, the earn-out captures that future growth for the seller.

3. Transition period: When the seller stays in the business for 1-2 years to ease the transition, the earn-out aligns their incentives with the performance of the business.

4. Specific identified risk: If the due diligence reveals a specific risk (loss of a key customer, a contract renewal pending), the earn-out can link part of the payment to that risk not materialising.

How do you structure an earn-out correctly?

Many of the problems originate in the structure of the earn-out. These are the key elements you need to define:

Reference metric

Choosing the metric is the most important decision:

• EBITDA: Traditionally, the most widely used criterion [1]. Clear and measurable, but open to manipulation if the buyer increases discretionary spending or reallocates costs from other divisions.
• Turnover (revenue): Harder to manipulate, but it does not reflect profitability. Useful when the focus is growth, not margin.
• Customer retention: Specific and easy to measure. Appropriate when the value of the business lies in its customer portfolio — for example, in gestorías (administrative and tax services firms) or companies with maintenance contracts.
• Specific milestones: Obtaining a licence, renewing a key contract, a certification. Less common but very effective for specific risks.

Duration

The duration is agreed in each transaction. As a guide:

• 1 year: When the risk is limited and the seller wants to exit quickly.
• 2 years: An intermediate duration. It allows the business to be assessed under normalised conditions.
• 3 years or more: Only justified in businesses with long business cycles or multi-year contracts.

Caps and floors

• Cap (maximum): Limits the maximum earn-out payment. Protects the buyer from paying more than is reasonable.
• Floor (minimum): Guarantees the seller a minimum payment even if not all targets are met. Not always included.

Measurement and verification mechanism

• Who calculates the results? The buyer, an independent auditor, both parties?
• Which accounting principles apply? The same ones used to calculate the reference EBITDA?
• Is there a dispute resolution mechanism? (Mediation, arbitration, independent expert)

Which mistakes are made most often?

These are the most frequent mistakes worth avoiding:

For the seller

• Accepting manipulable metrics without protections: If the earn-out is based on EBITDA and the buyer can charge corporate costs to the acquired business, your EBITDA falls artificially — and you do not get paid.
• Not including ordinary course of business clauses: The buyer could change the commercial strategy, raise prices and lose customers, or cut marketing investment. Without a clause requiring the business to be run "in the ordinary course", the seller is left unprotected.
• Overestimating your ability to influence results: If you stay on as a manager but without real decision-making power, you cannot control the results on which your earn-out depends.

For the buyer

• Using the earn-out as an excuse not to pay: An earn-out with unrealistic targets is not a negotiating tool — it is a way of buying cheaply.
• Not clearly defining the accounting rules: Ambiguities in measurement create disputes. Everything must be documented before signing.
• Creating perverse incentives: If the earn-out rewards short-term turnover, the seller could accept unprofitable contracts or discount aggressively to inflate the figures.

Illustrative example: distribution company in Castellón

Imagine a building-materials distributor in the province of Castellón with turnover of €2.5M and EBITDA of €300,000. The seller asks for €1,500,000 (5× EBITDA). The buyer offers €1,200,000 (4× EBITDA) because two major contracts expire in 18 months.

A possible solution: €1,050,000 at completion + an earn-out of up to €450,000 over 2 years, linked to the retention of the two key contracts (€150,000 for each renewal) and to maintaining a minimum EBITDA of €280,000 (a further €150,000).

Result: if the contracts are renewed and EBITDA holds, the seller receives €1,500,000 in total — the price they were asking, although part of it depends on future results — and the buyer only pays above their offer if the risk that worried them does not materialise.

How do you negotiate an earn-out as a seller?

These are the points you should defend:

1. Maximise the payment at completion: The larger the fixed part, the lower your risk. Aim for the earn-out to be only a minority part of the total price.
2. Choose metrics that cannot be manipulated: Turnover is safer than EBITDA if you will not have control over costs.
3. Include protections against management changes: An ordinary course of business clause, a ban on charging corporate costs, maintaining marketing investment.
4. Insist on an independent audit: Do not accept the buyer acting as both judge and party in measuring results.
5. Define a dispute resolution mechanism: Arbitration or an independent expert. The ordinary courts are slow and expensive.

How do you negotiate an earn-out as a buyer?

1. Link the earn-out to metrics that reflect real value: EBITDA is the metric most aligned with what you are buying.
2. Set interim milestones: Annual or six-monthly payments instead of a single payment at the end reduce the all-or-nothing risk.
3. Keep the seller involved: If the success of the earn-out depends on the transition, make sure the seller has a clear role and the necessary resources.
4. Be realistic with the targets: An earn-out with unattainable targets erodes the seller's trust and motivation during the transition.

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The earn-out is a tool that, used well, benefits both parties. But it has to be structured carefully to avoid disputes that can ruin relationships and deals.

If you are negotiating a sale or acquisition and have doubts about how to structure the price, it is worth talking to an adviser before signing.

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Frequently asked questions

What is an earn-out in the sale of a business?

An earn-out is a deferred payment mechanism in which part of the sale price is linked to the future performance of the business after completion. The seller receives an initial payment and the rest only if certain targets (EBITDA, turnover, customer retention) are met during an agreed subsequent period.

Is the earn-out common in SME transactions in Spain?

It is used especially when there is a valuation gap between buyer and seller or when the seller stays on for a transition period.

What percentage of the price is usually the earn-out?

It depends on each transaction, but it is usually a minority share of the total price. A high percentage creates too much risk for the seller and is usually a sign that the buyer does not trust the figures presented.

Can I refuse an earn-out as a seller?

Of course. The earn-out is a negotiating tool, not an obligation. If your figures are solid and verifiable, you can insist on a fixed price at completion. But bear in mind that rejecting an earn-out may mean accepting a lower price at completion.

What happens if the buyer manipulates the results to avoid paying?

This is the main risk for the seller. That is why it is essential to include contractual protections: an ordinary course of business clause, an independent audit of the results, and a dispute resolution mechanism (mediation or arbitration). Without these protections, the risk is real.

How is an earn-out taxed in Spain?

If the seller is an individual, the earn-out is taxed as a capital gain in the savings base of IRPF (Spanish personal income tax). When the price is received in instalments and the last one falls due more than one year after the sale, the seller can choose to recognise the gain as the payments become due (art. 14.2.d of the Ley del IRPF, the Personal Income Tax Act) [2]. The treatment of amounts that depend on meeting targets should be confirmed with a tax adviser, and if the amounts are significant, it is worth planning the tax structure before signing. More details in our tax guide to selling a business.

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References

[1] Sánchez-Runde, I. and Rodríguez del Valle, J. (Augusta Abogados). "Las cláusulas 'earn-out' en las operaciones de M&A: mecanismo coherente con negocios de incertidumbre" (Earn-out clauses in M&A transactions: a mechanism consistent with uncertain businesses). Legal Today, 2025.

[2] Ley 35/2006, de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (Spanish Personal Income Tax Act). Article 14.2.d): instalment or deferred-price transactions.