The metric an earn-out pays on is a number the buyer controls after completion, and the clauses that fix it cost far less than the money they protect.
Six ordinary post-completion adjustments, worth €1.30 million a year of EBITDA between them, remove €6.60 million of a €12.0 million earn-out. The business earned €16.90 million and €17.40 million of EBITDA against a €16.0 million threshold and an €18.0 million target. With the protection clauses in the agreement the earn-out pays €6.90 million. Without them it pays €0.30 million. Not one of the six adjustments is improper, and none of them is made in bad faith.
Worked in full in Closing the Deal by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Meridian Components is sold on an enterprise value of €118.0 million — 8.0 times €14.75 million of EBITDA — with an earn-out of up to €12.0 million over 2 years on top. The earn-out pays nothing below €16.0 million of EBITDA, pays in full at €18.0 million, runs on a straight line between the two and is capped at €6.0 million a year. As a share of enterprise value it is 10 per cent.
After completion the buyer does six ordinary things. None of them is improper and none of them is done to defeat the earn-out.
| Buyer action | Note | Effect on EBITDA (EUR m) |
|---|---|---|
| Buyer’s management charge | Allocated head office cost the target never bore | −0.75 |
| Change of accounting policy | Capitalisation threshold, revenue recognition | −0.35 |
| Integration and restructuring costs | Incurred to realise the buyer’s synergies | −0.60 |
| Synergy benefit credited | Procurement savings the buyer delivered | +0.45 |
| Bonus accrual for the retained team | New scheme, imposed after completion | −0.30 |
| Capex deferred by the buyer | Maintenance postponed; flatters the year | +0.25 |
| Net effect on each year’s EBITDA | −1.30 |
The business earned €16.90 million and €17.40 million. Both years clear the threshold comfortably, and on the reported numbers the earn-out pays €2.70 million and then €4.20 million. After the buyer’s adjustments the first year falls below the threshold entirely and the second barely crosses it.
| Basis | Year 1 (EUR m) | Year 2 (EUR m) | Total (EUR m) |
|---|---|---|---|
| EBITDA as reported by the business | 16.90 | 17.40 | |
| EBITDA after the buyer’s adjustments | 15.60 | 16.10 | |
| Earn-out with the protections | 2.70 | 4.20 | 6.90 |
| Earn-out without the protections | 0.00 | 0.30 | 0.30 |
| Difference | 6.60 |
€1.30 million a year of accounting entries removes €6.60 million of a €12.0 million earn-out. The seller receives €0.30 million instead of €6.90 million, on a business that beat its threshold in both years.
The leverage is in the arithmetic of the straight line, not in the size of the adjustment. Between a €16.0 million threshold and an €18.0 million target, €6.0 million of consideration is spread over €2.0 million of EBITDA: every euro of EBITDA is worth three euros of price. A charge the buyer would not think twice about in the ordinary running of a subsidiary is multiplied by three before it reaches the seller.
A buyer that has just paid €61.17 million for the shares is entitled to run the business, and a seller who asks for protections amounting to a veto will not get them. The trade that works is complete operational freedom and a shorter earn-out period for the buyer, against the six clauses above for the seller, plus an acceleration: a stated amount payable if the buyer sells the business, restructures it, or takes an action the covenant would otherwise prohibit. That converts every future argument into a price the buyer can choose to pay.
Price the clauses before conceding them. The six protections cost the buyer nothing in cash and are worth €6.60 million here, which is more than half the earn-out and more than a full turn of multiple on €14.75 million of EBITDA. They belong in the letter of intent, not in the third mark-up of the purchase agreement: once exclusivity has been granted the leverage has gone.
Then compute the band. The first euro is payable at €16.0 million and the maximum is reached at €18.0 million — a 12.5 per cent band on a business whose EBITDA moved from €14.75 million to €16.90 million in the last year. A band narrower than the business’s own volatility is not an incentive; it is a coin toss. And ask the threshold question first: who controls the thing the payment depends on? If the answer is the buyer, an earn-out on profit is a payment the buyer decides, and a metric outside the buyer’s control — revenue, or an operational milestone — is worth more than any set of protections written around EBITDA.
Yes. A head office charge of €0.75 million a year, a €0.35 million change of accounting policy, €0.60 million of integration costs and a €0.30 million bonus accrual are ordinary post-completion acts. Net of a €0.45 million synergy credit and €0.25 million of deferred capex, the six together cost €1.30 million of EBITDA a year.
That policies are frozen at those applied immediately before completion, and that any later change is disregarded for the earn-out calculation. With the exclusion of buyer group charges, integration costs and synergies, that is what preserves the €6.90 million the trading actually earned rather than the €0.30 million otherwise paid.
Maximum × (EBITDA − threshold) ÷ (target − threshold), capped at the maximum. On a €16.0 million threshold, an €18.0 million target and €6.0 million a year, EBITDA of €16.90 million pays €2.70 million and €17.40 million pays €4.20 million — €6.90 million over 2 years.
This article is one calculation from Closing the Deal. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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