Earn-outs in a business sale: what they promise, and where they fail

An earn-out is a deferred portion of the sale price paid to you, the seller, after closing, conditioned on the company's performance under its new owner — typically a percentage of revenue or EBITDA measured over one to three years post-closing. It makes sense when an honest disagreement separates buyer and seller over the company's future value, or when it bridges a financing gap the buyer's bank refuses to cover. It fails almost systematically, however, when the post-closing rules of the game — who decides what, how the metric is calculated, what happens in a dispute — stay vague at signing instead of being negotiated with the same rigor as the price itself.

When an earn-out genuinely belongs in the deal

An earn-out isn't a tool to reach for in every transaction — it answers specific situations. The most common is a valuation gap rooted in differing outlooks: the buyer doubts a major recent contract or a recent growth spurt will hold, while you believe firmly that it will. Rather than each side clinging to an irreconcilable number, both agree to let actual results settle the question — a firm base reflecting the value the buyer considers certain, plus a top-up paid if the announced performance materializes.

An earn-out also bridges the gap between the negotiated price and what the buyer can raise in equity and acquisition debt, particularly when the buyer is a manager or an individual rather than a strategic group with its own balance sheet. Here it plays a role close to seller financing, except its amount is never guaranteed — only its calculation formula is.

A third, more delicate use is retaining the outgoing owner through the post-sale period by tying part of the payout to results you continue to influence. That's a legitimate goal, but it deserves to be named explicitly in the negotiation rather than dressed up as a simple pricing adjustment — it's a different conversation, and it overlaps directly with the post-closing transition and the exact role you'll keep after signing.

What the calculation formula must fix without ambiguity

Most earn-out disputes aren't about the principle — they're about details both sides treated as secondary while negotiating price, which turn central once the company sits under new ownership.

• The metric chosen. Revenue is hard to manipulate but ignores profitability; EBITDA reflects real performance better, but depends on accounting choices — depreciation, provisions, group overhead allocations — the buyer controls alone after the takeover.
• The calculation method. The same accounting rules applied before the sale, documented in writing, with a right to a contradictory audit rather than a figure handed down unilaterally by the buyer at period-end.
• Duration and payment schedule. Rarely more than three years in Swiss practice — beyond that, your influence over the result fades and the uncertainty becomes disproportionate to the expected gain.
• Treatment of exceptional events. The buyer acquiring a competing activity, a change in perimeter, a major investment decided by the new management — each of these can artificially inflate or crush the chosen metric, and needs to be neutralized by an explicit clause.

Why so many earn-outs go wrong

A poorly framed earn-out doesn't fund trust between buyer and seller — it organizes their disagreement over two or three years instead of settling it at signing.

The most frequent cause of failure isn't bad faith — it's a structural asymmetry: the buyer now controls the decisions that determine the metric — commercial policy, investment, cost management, strategic priorities — while you bear the financial consequences without any further say. A buyer who redirects the company toward other priorities, even with entirely legitimate intent, can weaken the very metric your top-up depends on without meaning any harm.

On top of that sits a real temptation, documented in plenty of disputes: some buyers deliberately shape their accounting or operational choices to minimize the final amount owed, betting that a seller who has already left the company has little means to verify or contest the figures presented to them.

The clauses that actually protect the seller

A well-negotiated earn-out rests on information-access guarantees, not just on a mathematical formula.

• A right to a contradictory audit. Access, through an independent expert engaged at your expense, to the accounts and supporting records used in the calculation, with a defined window to contest them.
• Minimal operating covenants. A buyer commitment not to substantially change the perimeter, commercial policy, or cost structure of the business without informing you, for as long as the earn-out runs.
• An explicit good-faith clause. A contractual obligation for the buyer to run the company during the earn-out period in a manner reasonably consistent with prior practice, rather than oriented toward minimizing the amount owed.
• A dispute-resolution mechanism. An arbitration or independent-expert procedure agreed in advance, rather than lengthy and costly litigation as the only recourse if the calculation is disputed.

These clauses overlap directly with what a seller-side due diligence examines: the quality of your existing accounting documentation determines whether you can verify, two or three years later, that the figures presented faithfully reflect how the company actually performed.

Negotiating the earn-out's share of the total price

The most useful rule of thumb is to limit the earn-out to the portion of the price where a genuine disagreement remains, and to secure the rest through equity or confirmed bank debt. An earn-out representing more than a third of the total price shifts a disproportionate share of the deal's risk onto you, even though you no longer control the decisions that determine its outcome. That balance gets negotiated at the letter of intent stage, not while drafting the definitive agreement — the earlier the calculation principles and safeguards are set, the less they get fought over under closing-calendar pressure.

A structured succession diagnosis helps you assess, before an offer even arrives, what share of earn-out remains reasonable for your company and under what conditions such a mechanism genuinely protects your interests. To discuss it concretely, book a session.