Afterwards
Living through an earn-out
An earn-out turns part of the sale into a job with a bonus attached, and the terms of that bonus were written before anyone knew how the year would go.
What has to be defined
- The measure: revenue, gross profit or a result after costs
- Who prepares the figures and who may check them
- Which costs the buyer may allocate to the business
- What happens if the buyer changes the strategy, the range or the pricing
- How a disagreement is resolved, and by whom
Where it goes wrong
Almost always in the same place: the buyer makes a legitimate change that reduces the measured result. New group overheads are allocated. A range is discontinued. Marketing is redirected. None of it is bad faith, and all of it reduces the payment.
Clauses that protect against this are negotiable at the outset and impossible to add afterwards.
Practical advice
The shorter the period, the simpler the measure and the higher the portion paid at completion, the fewer disputes follow. An earn-out over one year on gross profit causes less trouble than three years on net result.