An earn-out is a pricing mechanism where part of the purchase price is linked to the future financial performance of the company. It is often used when the buyer and the seller have different expectations regarding the company’s valuation, or as an incentive for existing shareholders or management to remain engaged after the transaction and maintain strong performance.
In practice, an earn-out allows the seller to receive an additional payment if the company achieves agreed financial or business targets following the transaction. It helps to bridge the valuation gap between the parties — the buyer pays a base price upfront and commits to paying more if the company performs well.
This mechanism is particularly common in transactions where:
- the seller remains involved in the business post-closing (e.g., as management or minority shareholder),
- the company operates in a rapidly changing or high-growth industry,
- or the buyer wants to minimize the risk of overpaying for future potential that has not yet materialized.
In essence, an earn-out aligns the interests of both sides — it rewards the seller for continued performance and protects the buyer from paying for results that may not be achieved.
If you need experienced legal support in structuring or negotiating an earn-out, get in touch with our M&A team at MFW Fiałek.