Earn-out in company sales: Advantages and disadvantages

If buyers and sellers do not agree on the selling price or the future of the company, an earn-out may help. Then, the purchase price consists of a fixed, immediate cash payment and a success-dependent additional payment at a later date ("Earn-out"). We show you the advantages and disadvantages of this solution.

The most obvious advantage of an earn-out clause lies in the continuation of negotiations and the possibility of a conclusion, even though the price expectations of seller and buyer differ. However, this opportunity also holds the risk that the same parties cannot agree on the basis for measuring the Earn-out.

Advantages and Disadvantages for the Buyer

The greatest advantage for the buyer lies in minimizing their risk: Instead of buying a pig in a poke and having to rely on assumptions about future market and business conditions, the buyer can observe how the company develops. This period also allows more time for restructuring within the company. Although the buyer, if the business situation develops positively, pays a higher overall price for the company, they also minimize the likelihood of paying too much if the company should perform less well than expected. However, since the seller continues to manage the business and the earn-out payment is dependent on success, they will do everything possible to prevent this. Another advantage for the buyer is the staggering of the capital requirements, which divides the total price into several payments.

A disadvantage of the Earn-out solution is, in particular, the transparency towards the seller, who continues to influence the day-to-day business. This can also make planned restructuring by the buyer more difficult. Furthermore, as mentioned, the minimization of risk for the buyer also brings the possibility of an overall higher purchase price.

Advantages and Disadvantages for the Seller

The seller continues to bear the risk for the success of the company. However, if it takes a positive course, they can be rewarded with a higher selling price. To achieve this, the seller remains in the company and influences its development.

On the other hand, the sales proceeds may be lower if the business situation deteriorates after the start of the Earn-out period. The seller has only limited influence on the success of the company. The order situation can also deteriorate purely due to the market conditions, without any fault of the managing director. Another disadvantage for the seller may be the splitting of the payment, especially if there is financial pressure.

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