Earn-out

An earn-out is a contractual mechanism where part of the purchase price is paid later and made conditional on certain targets being met after completion. Instead of paying the full price at completion, the buyer pays a base amount now and additional consideration at a later date if the property or the company delivers what the parties have agreed. Earn-outs are used to bridge a gap in price expectations: the seller believes the property is worth more than the buyer will pay today, and a conditional deferred payment lets them share the risk of whether the optimistic assumptions hold true.

In property, earn-outs most often appear in two situations. The first is the purchase of a property with vacant space or a short remaining lease term, where part of the price is only triggered once the premises are let to an agreed level, or once contracts have been extended. The second is the purchase of a development project or a site, where the deferred payment is tied to a zoning plan being adopted, an outline planning permission being granted, or an agreed development volume (UFA) being achieved. Earn-outs are just as relevant in a company sale (the sale of the shares in the property company) as in a direct sale of the property.

The mechanics must be set out carefully in the purchase contract. The agreement must define the target figure precisely, the measurement period, how and when the deferred payment is calculated, and not least who manages the property in the meantime, since the buyer's operation affects whether the seller's target is met. Disputes about earn-outs typically concern exactly this: whether the buyer has worked against achieving the target, or whether the accounting figures have been prepared in a way that reduces the deferred payment. Earn-out clauses are therefore often accompanied by audit rights, defined accounting principles and a dispute resolution mechanism.

For advisers and lawyers, an earn-out is a central topic in due diligence and contract negotiation, because it shifts risk and requires follow-up for a long time after signing. It must be kept separate from an ordinary retention (escrow/deposit for known warranty claims) and from working capital price adjustments at completion. An earn-out concerns future performance; retentions and price adjustments concern matters that are already known at the completion date.

From Placepoint's dictionary: Earn-out

More information: Lovdata: avhendingslova

English: Earn-out (contingent deferred consideration).