An earn-out makes part of the price contingent on the business achieving something after completion — usually turnover or profit over a period. The seller no longer owns or runs that business. Everything difficult about earn-outs follows from that single fact.
Why They Go Wrong Without Anyone Behaving Badly
The buyer decides what the business spends, what it invests in, how costs are allocated, whether it is merged into another operation, whether staff or customers move elsewhere within the group, and how aggressively it pursues growth versus margin. Ordinary post-acquisition integration — sensible from the buyer’s perspective, and not directed at the seller at all — can make an earn-out target unreachable. Central overheads get allocated to the business. A sales team is restructured. A product line is discontinued because it duplicates something the group already sells. Each is a legitimate commercial decision; collectively they can eliminate the seller’s remaining consideration. That is why earn-out disputes are common and why they are frequently disputes without villains. It is also why the honest framing for a seller is: treat an earn-out as money you may not receive, and negotiate the guaranteed element accordingly rather than comforting yourself with the headline figure.
What to Insist On
A clearly defined, objectively measurable metric, with the accounting policies for calculating it specified in the agreement rather than left to be agreed later — that single point prevents a large share of disputes. Prefer a simpler measure over a more “accurate” one: turnover is harder to manipulate than profit, because profit runs through cost allocations you do not control. Conduct covenants restricting the buyer during the period: no diverting business elsewhere in the group, no arbitrary central cost allocations, no fundamental change to how the business is run. Information rights, so you see the figures as they develop rather than receiving a number at the end. A dispute mechanism referring disagreements to an independent expert, resolving in weeks rather than through litigation. And realistically, either a role during the period, or an acknowledgement that without one the target should be lower and the guaranteed element higher. Note too the interaction with restrictive covenants: if you stay on, the covenant period may run from the end of your engagement rather than from completion.
Compare offers on what actually arrives. A smaller guaranteed sum paid at completion is frequently worth more than a larger headline of which a substantial part is contingent, deferred and unsecured — and it does not cost you the next two years of watching.
Been offered an earn-out? 01 5827148.
Richard O’Shea — Solicitor & TEP
Solicitor at Mary Molloy Solicitors, established 1981, and a TEP of the Society of Trust and Estate Practitioners. The firm acts for buyers and sellers on business sales and acquisitions — structure, heads of terms, due diligence, the sale agreement, warranties and disclosure, completion and what follows it. Because a substantial share of Irish business sales are retirement exits, the firm’s estate and succession practice sits alongside the transactional work: the deal and what happens to the proceeds are usually the same client’s problem. Nothing here is tax advice — structure is tax-driven and that belongs with your accountant and Revenue, before heads of terms are signed. 01 5827148 · richardoshea@marymolloysolicitors.com · LinkedIn
General information, not legal advice. This website contains general information about Irish law on business sales and acquisitions. It is not legal advice and does not create a solicitor—client relationship. Every transaction turns on its own facts — the structure, the documents, the parties, the consents required — and advice on yours requires a consultation.
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