Earn-out terms: points to negotiate

An earn-out makes part of the sale price depend on future performance. Define the measure and period carefully, then consider who controls the business during that period. A seller may depend on decisions made by the buyer after completion, including investment, customer allocation and cost charging.

Agree the accounting policies, permitted adjustments, information rights and calculation process. Test exceptional events such as acquisitions, restructuring or a further sale. Keep employment or consultancy payments distinct from sale consideration and obtain tax advice on the actual arrangement.

Choose a measure that reflects the bargain

Define the performance measure and period precisely. Revenue, gross profit and adjusted earnings respond differently to discounts, returns, cost allocation and investment decisions. Avoid using a familiar accounting abbreviation without defining the calculation. Agree which business, customers and activities are included, especially if the buyer expects to integrate the target into a larger group soon after completion.

Build a worked calculation from recent figures and several future scenarios. Test a delayed customer payment, a large refund, a new group charge and a contract moved to another subsidiary. A formula that works only for the forecast case leaves the parties exposed to disputes when ordinary business changes occur. Record accounting policies and the order in which special adjustments and general standards apply.

Address control after the seller gives up ownership

Identify decisions the buyer can make that affect the measure: staffing, marketing spend, customer allocation, acquisitions and closure of product lines. Negotiate any operating commitments or restrictions carefully so they protect the agreed payment without making the business impossible to manage. The seller should understand where the buyer retains discretion and which outcomes remain genuine commercial risk rather than a contractual breach.

If the seller remains employed or engaged as a consultant, distinguish their work obligations from the sale price. Consider departure, illness, dismissal and changes in role. HMRC identifies factors relevant to whether an earn-out represents sale consideration rather than remuneration for continuing employment. ^[1] Obtain tax advice on the actual arrangements and avoid assuming the purchase agreement's label decides the treatment.

Make reporting and verification practical

Agree what information the seller receives, how often and in what format. A right to inspect may be difficult to use if the relevant records are merged into group systems without an agreed method of separation. Identify who prepares the calculation and what supporting schedules must accompany it. Restrict access appropriately to protect confidential business and personal information while still enabling meaningful review.

Set a review period, objection process and route for unresolved disputes. Distinguish accounting questions from legal interpretation or alleged breaches of operating covenants. An independent accountant may be suitable for defined calculation disputes but should not be assumed to resolve every issue under the agreement. Review appointment, scope, costs and the effect of the decision before a disagreement arises.

Test exceptional events and the payment mechanics

Consider a further sale, restructuring, business closure or acquisition during the earn-out period. Decide whether the calculation continues, accelerates or follows another agreed method. Check the effect of related-party transactions and changes in accounting policies. Avoid leaving a major event to an undefined duty to act fairly when the parties could agree a clearer commercial treatment at the outset.

Link the final determination to an exact payment process, including due dates, deductions and any security. Use Deferred consideration and payment risk for the buyer's payment risk and Completion accounts and price adjustments to distinguish earn-out calculations from completion accounts adjustments. They may use similar accounting concepts but address different periods and purposes. Check that the same item is not inadvertently counted twice in different price mechanisms.

For Business sale document review, bring the proposed formula, financial model and plans for the business after sale. Include the seller's continuing role and the buyer's integration assumptions. Ask for scenario testing across accounting, legal and tax workstreams before signing. Keep the agreed examples with the executed documents where appropriate, so later reviewers can understand the intended calculation without relying on the negotiating team's memory.

Test a disputed customer receipt

Imagine a major customer pays late, after the earn-out measurement period has ended. Determine whether the agreed metric follows revenue recognition, invoicing or cash collection, and how any bad-debt adjustment works. Then test the reverse case: cash arrives early for work that will be delivered later.

Use these examples to expose ambiguities before the agreement is signed. The contract should identify the relevant accounting or calculation rules and how disagreements are resolved, without assuming that every business report uses the same basis. Give the finance team a worked illustration of the agreed mechanism. This makes future reporting easier to reproduce and prevents ordinary timing differences from turning into avoidable disputes about the commercial bargain.

Illustrative scenario

An earn-out uses profit, but the buyer plans to charge new central management fees to the acquired business. The parties decide how those charges affect the calculation and document the rule. A worked example exposes the issue before completion, when the seller still has an opportunity to negotiate.

Preparation checklist

• Define the metric, period and calculation policies.
• Assess buyer decisions that can change the result.
• Agree reporting, inspection and dispute rights.
• Test restructuring, closure and resale scenarios.