Earn-out

An earn-out is a deferred and conditional price supplement whereby an additional payment is made to the seller if the acquired business achieves pre-agreed performance targets (revenue, EBITDA, customer metrics or technology milestones) over a defined post-closing period, typically 1 to 3 years. It is used to bridge the valuation gap between an optimistic seller and a prudent buyer when future performance is uncertain: the seller receives upside if their projections prove correct, the buyer gains downside protection if they do not, while seller interests remain aligned with post-acquisition success. Its structure must be precisely defined in the SPA: performance indicators and metric definitions, calculation formula, applicable accounting rules, permitted adjustments, post-closing governance, buyer non-interference and cooperation obligations, and independent verification mechanisms. Exhaustive drafting is critical, as earn-out litigation is one of the most common post-M&A legal conflicts.

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Example: in the sale of a Swiss advisory firm at a base price of CHF 14.0 million, a CHF 4.0 million earn-out is structured over two years: CHF 2.0 million if EBITDA exceeds CHF 2.5 million in year 1, CHF 2.0 million additional if EBITDA exceeds CHF 3.0 million in year 2, with governance rules and financial reporting obligations defined precisely in the SPA to prevent opportunistic behaviour by the buyer during the earn-out period. In another transaction, a Swiss SaaS company valued at CHF 15.0 million base (8x ARR of CHF 1.875 million) includes a CHF 5.0 million earn-out over 2 years: CHF 2.5 million if ARR reaches CHF 2.5 million in Year 1, CHF 2.5 million additional if ARR reaches CHF 3.2 million in Year 2. The earn-out present value (probability-weighted at 70% and 55%) is CHF 3.0 million, recognised as contingent consideration in the IFRS 3 PPA at the acquisition date.

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At Hectelion, we structure, model and value earn-outs to effectively bridge valuation gaps without creating the conditions for post-closing disputes, and we act as expert where earn-out calculation methodologies are contested.