Earn-outs can unlock a deal when pricing is uncertain, but they only work for buyers if the drafting is clear and the business can be run without unnecessary constraints. This guide focuses on the buyer view: where the terms belong in your SPA, which performance metrics are safest, how to balance control and integration, and the practical payment and security options that reduce risk.
Who is this for? UK acquirers and in-house leaders negotiating private M&A, especially where founders will stay on post-completion. You’ll find a concise, plain-English walk-through of the topics buyers ask about most, with context on why each point matters to value protection and dispute avoidance.
If you want targeted help, our M&A lawyers can draft or review your SPA and earn-out schedule, or pressure-test a term sheet before it’s signed.
Jump to:
- What is an earn-out and why would a buyer use one?
- Where do earn-out terms sit in the SPA and why does that matter?
- Choosing buyer-safe performance metrics (and defining them precisely)
- Earn-out period and payment structure
- Operational control and integration: protecting the buyer’s freedom to run the business
- Seller’s ongoing role and incentives
- Payment mechanics, security and credit risk
- Change of control and buyer group actions
- Negotiation playbook: typical trades and walk-aways
- The importance of onboarding M&A lawyers
What is an earn-out and why would a buyer use one?
An earn-out is a clause in a sale and purchase agreement (SPA) that ties part of the price to the target’s post-completion performance. Buyers use it to bridge a valuation gap, align incentives if sellers remain involved and smooth cash flow by deferring consideration until results are proven. UK commentary places the typical period around 1-3 years (sometimes longer in specific sectors). This context matters because your deal model, integration plan and risk allocation all hinge on how performance will be measured and over what time.
Where do earn-out terms sit in the SPA and why does that matter?
Place the detailed mechanics in a dedicated schedule that the SPA references. This improves clarity and makes post-completion administration easier. The schedule should set the accounting framework (e.g., FRS 102 or UK-adopted IFRS), a hierarchy for policies, definitions of the metric, a worked example, timing for statements/objections and the payment method.
Anchoring to an identified GAAP and stating the policy hierarchy reduces room for argument later.
If you’re new to SPA structure, our share purchase agreement guide shows how schedules fit with the main body.
Choosing buyer-safe performance metrics (and defining them precisely)
Your metric must be objective, auditable and aligned to how you’ll run the business:
- EBITDA/operating profit with explicit normalisations (integration costs, one-offs, share-based payments) and consistent policies. Tie definitions to GAAP and set a policy hierarchy in the schedule.
- Revenue or gross profit can suit earlier-stage or expansion plays but may encourage unprofitable sales unless paired with quality gates (e.g., gross-margin floors, churn caps).
- SaaS ARR/MRR or non-financial KPIs (e.g., customer numbers) are used in growth deals; because these are alternative performance measures (APMs), define them tightly and keep definitions consistent over time to avoid disputes. The ESMA APM guidance is a helpful benchmark for clear definitions and reconciliations.
Why it matters: vague or adjustable metrics are the single biggest driver of post-deal disagreement over the number. Good definitions bring certainty and protect value.
Earn-out period and payment structure
Buyers commonly set 1–3 year periods. Shorter periods concentrate focus; longer ones test sustainability but can blur whether results reflect the seller’s legacy or the buyer’s stewardship. Payments can be single (after the period) or staged after each year-end. Setting the timetable, currency and any interest on late payment helps cash-flow planning and avoids friction. Consider caps/floors, ratchets and de-minimis thresholds appropriate to your model.
Operational control and integration: protecting the buyer’s freedom to run the business
Most disputes stem from the tension between buyer control and seller protection. Keep operational freedom by avoiding broad “operate to maximise the earn-out” obligations; instead, agree targeted guardrails (for example, not taking actions primarily intended to depress the metric) and carve-outs for integration and changes required by law or GAAP.
Why it matters: you need to integrate systems/teams, invest or restructure without a seller veto, otherwise you risk freezing the business to protect the earn-out.
Seller’s ongoing role and incentives
If founders stay on, formalise their role, objectives and reporting lines in a service or consultancy agreement, not just the SPA. Align incentives so hitting the metric does not damage long-term value. Where equity or options are involved, ensure good/bad leaver terms and restrictive covenants are clear and proportionate. Many earn-outs assume sellers remain for the period, which is why role clarity and leaver outcomes are so important.
For background on leaver mechanics, read our guide to leaver provisions.
Payment mechanics, security and credit risk
Set out how consideration is paid (cash, buyer shares or loan notes), when, and any conditions. Sellers often press for escrow/retention or guarantees to secure future payments; buyers can limit cost and complexity by capping security, setting release milestones and aligning it with any set-off rights in the SPA. UK practitioners commonly reference escrows/retentions, bank guarantees and information rights during the period, your negotiating stance will depend on price, risk and the seller’s involvement.
Why it matters: clarity here reduces credit risk and avoids later arguments about whether funds are due or can be withheld.
Change of control and buyer group actions
Agree what happens if you sell the target or your wider group changes control during the earn-out. Sellers may ask for acceleration; buyers typically resist or limit it. Also address the effect of group reorganisations or integrations on the calculation (for example, pro-forma adjustments if revenues are shared across group entities). Handling these points now avoids later disputes about whether the earn-out was frustrated by buyer actions.
Find out more about how to avoid an earn-out dispute in our article.
Negotiation playbook: typical trades and walk-aways
Common trades:
- Headline price vs tighter controls. The more you pay up-front, the more flexibility you’ll want on conduct and integration.
- Shorter period vs higher cap. Shorter, focused periods can justify higher potential payouts if targets are hit; longer periods test durability but increase uncertainty.
- Revenue vs profit-based metrics. Simpler revenue targets can be balanced with margin floors or churn caps; EBITDA needs careful adjustments and policy locks but best aligns to value.
Buyer walk-aways (hold the line):
- Precise metric definitions and policy hierarchy tied to GAAP in the schedule.
- Operational freedom with only targeted anti-avoidance wording (no duty to maximise the earn-out).
- Proportionate security and clear payment mechanics, aligned with any set-off rights.
The importance of onboarding M&A lawyers
Bringing M&A lawyers on board early in the process can make a decisive difference to the outcome of your deal. From shaping an earn-out that protects value to negotiating accounting policies, control rights and security, experienced legal support ensures that commercial agreements work in practice. not just on paper.
If you’re ready to sign an earn-out, you may benefit from reading our article on what to know before signing an earn-out agreement.
We have expertise to help you design structures that safeguard your position and drive the deal forward. Speak to our M&A lawyers today and a member of our team will be in contact.
