Earn-outs in Dutch M&A
Earn-outs are used in Dutch M&A transactions when buyer and seller cannot fully agree on valuation. Part of the purchase price is then paid after completion, depending on the future performance of the target business.
They are commonly used in founder-led businesses, growth companies and transactions where future revenue or profitability is uncertain. An earn-out can help bridge the gap between different valuation expectations, while allowing the seller to benefit from future upside if the business performs well after closing.
At the same time, earn-outs are one of the most common sources of post-closing disputes in Dutch M&A transactions. The reason is simple: after completion, the buyer controls the business, while the seller’s additional consideration still depends on its performance.
This article is part of the M&A Insights series on Dutch deal practice, which covers practical issues in Dutch acquisitions, including share deals, asset deals, purchase price mechanisms, disclosure, warranty protection and post-closing risk allocation. For related Dutch M&A pricing issues, see Locked Box vs Completion Accounts in Dutch M&A and Vendor Loans and Deferred Consideration in Dutch Acquisitions.
What is an earn-out?
An earn-out is an additional payment to the seller if agreed targets are achieved after completion.
The earn-out may be based on revenue, EBITDA, profit, recurring revenue, customer retention, signed contracts or operational milestones. The parties may agree that the seller receives additional consideration if the target business reaches certain financial or commercial objectives during the earn-out period.
The chosen metric should be objective, measurable and difficult to manipulate. If the earn-out structure is unclear, disputes often arise after completion.
Key issues in Dutch earn-outs
Performance metrics:
The SPA should define the earn-out metric precisely. EBITDA, revenue and profit can all be affected by accounting policies, group charges, integration costs and management decisions after closing.
For example, EBITDA may change significantly depending on how costs are allocated within the buyer’s group or whether exceptional expenses are included. The parties should therefore agree how the metric is calculated and which accounting principles apply.
Post-closing control:
One of the main tensions in an earn-out structure is that the seller no longer controls the business after completion, while the earn-out depends on future performance.
This is often the most sensitive part of an earn-out. A buyer will usually want freedom to integrate the target into its wider group and manage the business as it sees fit. A seller will want protection against decisions that artificially reduce the earn-out.
The SPA should therefore address whether the business must be operated in the ordinary course, whether integration is permitted and whether costs or revenue may be reallocated after completion.
Accounting policies:
Earn-out disputes often become accounting disputes. The SPA should specify which accounting principles apply, whether historical accounting policies continue and how exceptional or non-recurring items are treated.
Without clear drafting, the parties may effectively renegotiate the purchase price after completion.
Information rights:
The seller needs sufficient information to verify the earn-out calculation. The SPA should therefore include reporting obligations, access to relevant financial information and a clear review and dispute process.
If the seller has insufficient visibility into the company’s financial performance after closing, it becomes much harder to challenge an incorrect earn-out calculation.
Common dispute risks
Earn-out disputes often arise over:
- EBITDA calculations;
- allocation of group costs;
- changes in accounting policies;
- integration of the target;
- diversion of revenue;
- customer retention;
- lack of transparency;
- milestone interpretation.
These disputes are often difficult because they arise after the seller has lost control over the company. Clear drafting at signing is therefore essential. Once the earn-out period has started, it is usually too late to fix an unclear mechanism.
Practical takeaway
Earn-outs can be effective tools to bridge valuation gaps in Dutch M&A transactions, especially in growth businesses and uncertain markets. However, they should not be drafted as a short payment clause at the end of the SPA.
The key issues are performance metrics, accounting methodology, post-closing conduct, information rights and dispute procedures. The clearer the structure, the lower the risk of post-closing disputes.
About Dirk de Waard
Dirk de Waard is a Dutch corporate and M&A lawyer focusing on mid-market and cross-border transactions. He advises founders, investors, management teams and international businesses on acquisitions, investments, governance and post-closing disputes in the Netherlands.
Questions about earn-outs or M&A transactions in the Netherlands? Send an email to dirk.dewaard@viottalaw.com.
