"Earn-out" is a mechanism used in M&A transactions where the contract, in addition to payment in advance, provides for future payments to the seller after the company achieves certain financial results. This is usually the level of sales revenues and / or EBITDA. It is important that the adopted indicator be unambiguous and easily verifiable, which minimizes the risk of a dispute between the parties. The  financial items that are taken into account for the calculation of earn-out should be precisely defined, in particular with regard to the elements that will not affect the calculation (e.g. revenues obtained from the group belonging to the buyer, after the acquisition).

Earn-out as a potential deferred part of the price is usually determined based on a certain forecast of the company's results. Therefore, if the buyer does not fully share the seller's optimism about the company’s forecasted results, earn-out eliminates the risk of his paying too high a price, while the seller will receive a higher price when his forecasts come true. The earn-out clauses most often cover a period of several years after the sale, and their total value may in some cases constitute a significant part of the total price received by the seller.

Precise contractual provisions are the basis for ensuring comfort for both parties to the transaction

We usually deal with earn-out mechanisms when a partner stays in the company together with the buyer to manage the business. In such a scenario, earn-out is a beneficial solution for both parties, because the seller, being inside the company, has greater control over whether the earn-out provisions are implemented, and at the same time has a great incentive for the company to achieve the best possible result, which is also, as a rule, in the interest of the buyer, who is already a partner of the company. In practice, there are also cases where the seller entitled to earn-out does not stay with the company and the company’s future results are mainly influenced by actions taken by the buyer. In such situations, it is important to provide the seller with appropriate mechanisms to verify the company's results, which are the basis for calculating the earn-out amount.

When formulating the earn-out clause, attention should be paid to, inter alia, a precise determination of what conditions must exist to determine that the criteria for the payment of earn-out have been met, and who, how and according to what procedure, may question the application of the clause. It is important that the calculation mechanism take into account mutually agreed one-off events that may affect achievement of the required thresholds for the earn-out payment and are sometimes objectively independent of the management or are a purely accounting operation. Often, provisions are also introduced specifying the role of an external expert or arbitrator to assist the parties in verifying the correctness of earn-out calculations. In addition, it is necessary to make a list of the buyer's obligations regarding the continuation of business activities in a set scope, his taking or not taking certain actions, etc., in order to ensure that the company continues to develop in line with the forecasts and is eligible for earn-out payments. It may also be important to make a list of activities which the buyer ( the majority shareholder of the company by now) was not permitted to undertake, so that the buyer would not be deprived of the earn-out.

The need to make settlements in the future may create the risk of conflicts and long-lasting disputes. To avoid this, it is crucial that the earn-out provisions be formulated simultaneously in the most precise and unambiguous manner, and that they be clear and understandable not only for their authors.