Earnouts are ubiquitous in mid-market M&A as a price-gap bridge — but they are fundamentally a form of performance risk transferred from buyer to seller. A seller who believes EBITDA will reach €3m next year but is receiving a base price calculated on €2.5m EBITDA may accept an earnout of €2.5m (= €0.5m EBITDA × 5× earnout multiple) — but only collects it if the €3m is actually achieved under new ownership.
The critical issue: under new ownership, the seller has lost operational control. The buyer now makes decisions on pricing, costs, investment, and customer strategy that directly affect the EBITDA metric on which the earnout is based. Buyers can rationally (and sometimes deliberately) take decisions that maximize long-term business health at the expense of short-term EBITDA — missing the earnout target while building a better business. Sellers must negotiate: (1) clear accounting principles for the earnout metric; (2) non-interference obligations on the buyer during the earnout period; (3) change of control provisions if the business is re-sold; (4) accelerated earnout triggers for outperformance.
In France and Switzerland, earnout litigation is common. The most frequent disputes: buyer changes accounting policies affecting EBITDA calculation, buyer allocates corporate overhead to the subsidiary reducing its EBITDA, buyer fails to invest in sales capacity reducing revenue growth. Protective clauses in the SPA are the only defense — post-closing, sellers have limited leverage.
Earnout structure analysis
Deal: €20m base EV + €5m earnout if EBITDA ≥ €3m in Year 2 (binary). Seller perspective: if EBITDA misses target by €100k (€2.9m vs €3.0m), seller loses entire €5m. Risk-adjusted earnout value at 70% probability of achievement: €3.5m. Equivalent certain value of €5m earnout = ~€3.5m. Better structure: sliding scale earnout (€2m if EBITDA ≥ €2.7m, €3.5m if ≥ €2.9m, €5m if ≥ €3.1m) — reduces cliff-edge risk for both parties.
Frequently asked questions
How long should an earnout period last?
12–24 months is the typical range. Shorter earnouts (12 months) are easier to achieve and easier to dispute; 36+ month earnouts create sustained management alignment but are difficult to protect contractually as business conditions change. The earnout period should align with the business's natural planning cycle — annual for most SMEs, semi-annual for businesses with clear half-year reporting.
Should a seller ever accept an earnout?
Only if: (1) the earnout metric is within the seller's control or clearly protected by non-interference obligations; (2) the earnout is economically meaningful relative to the base price (i.e., achieving it would genuinely change the seller's outcome); (3) the earnout is documented in sufficient legal detail to be enforceable; and (4) the seller trusts the buyer to operate the business in a way consistent with earnout achievement. Sellers should treat any earnout above 25% of total consideration with significant caution.
What is the tax treatment of earnouts in France?
Earnout payments received by French individuals are generally taxed as capital gains in the year of receipt, at the PFU rate (30%) or IR progressive scale. The timing of recognition depends on whether the earnout is considered fixed (taxed at closing) or genuinely contingent (taxed at receipt). French tax counsel should be engaged to structure the SPA earnout clause in a way that defers taxation to receipt — this has significant cash flow implications.