Company transactions are often characterised by disputes about the sale price. The buyer has a critical view of the seller’s optimistic planning. The seller, on the other hand, sees the buyer’s interest in risk aspects as an attempt to drive the purchase price down. It is precisely this point that often leads to failure in negotiations of company acquisitions and sales. Easily, the discussions could have been shortened with the agreement on an earn-out clause that is fair to both sides.

The earn-out clause formulates additional price or guarantee agreements that include the reduction or indeed the increase of the purchase price if the actual development subsequent to the transaction is different from that planned. For example, a basic purchase price is agreed. Should the planned results be achieved or even exceeded, then additional and variable elements of the purchase price will be paid. The overall purchase price is thus understood as the cash value of all payments flowing to the company’s seller over a defined period.

There are obvious advantages to the earn-out clause for both purchaser and vendor:

The buyer gains security and pays the higher purchase price only if the target values are actually achieved.
The buyer not only improves his security; he also benefits from a financing effect which can be considerable. The sums exceeding the basic purchase price are not payable immediately. The payment extends over the agreed period and is mostly carried out in multiple tranches.
The company’s positive development often means that the vendor benefits from a higher purchase price than expected in the first place. However, the seller should ensure that he can monitor or maintain influence over the business and accounting policies during the complete transition phase.