Earn-out in the Purchase Agreement:
How the Earn-out Clause Works in a Business Sale

An earn-out in the purchase agreement links part of the purchase price to the future development of your company. For buyers it reduces risk; for sellers it opens the way to a higher total price. Yet the earn-out clause is one of the provisions in a company purchase agreement most prone to disputes. This guide shows how earn-outs work, how to structure them and how they are taxed in Germany.

What is an earn-out in the purchase agreement?

An earn-out is a conditional, variable portion of the purchase price that the buyer only pays if the company reaches agreed targets after closing. The purchase price is thus divided into two parts: a fixed base purchase price paid on completion, and a performance-related part that becomes due after the end of one or more measurement periods. The targets are usually financial metrics such as EBITDA or revenue, less often operational milestones.

Why do buyers and sellers agree an earn-out?

An earn-out bridges the valuation gap between buyer and seller. The seller values the company on the basis of its business plan, the buyer on the basis of its proven track record. If the two views diverge, the earn-out shifts part of the dispute into the future: if the plan is achieved, the seller receives the higher price. If the result fails to materialise, the buyer pays less.

Typical occasions are strong expected growth, a new product, a major customer being acquired or a business that depends heavily on the person of the owner. How price expectations form during the process is explained in our article on purchase price negotiation.

How common are earn-outs?

Earn-outs are more common in Europe than ever before. According to the CMS European M&A Study 2026, which analyses 601 transactions from 2025, 27 percent of deals included an earn-out. In 2024 the figure was 25 percent, and the average for the years 2015 to 2024 was around 23 percent. Earn-outs are most common in transactions below €25 million and in the technology, media and communications sector (44 percent).

The terms are also well documented:

Source: CMS European M&A Study 2026.

There is hardly any public data for Europe on the share of the purchase price. For US deals outside life sciences, the median earn-out according to SRS Acquiom 2024 was 31 percent of the payments at closing, with an average term of 24 months. These figures can only be applied to the German Mittelstand (mid-sized, owner-managed companies) to a limited extent.

Which metrics are suitable for an earn-out?

The metric should be objectively measurable and as little open to influence by the buyer as possible. According to CMS, 55 percent of European earn-outs in 2025 used EBIT or EBITDA, and 21 percent revenue. Each metric has strengths and weaknesses:

The valuation basis and the metric should match. If the purchase price is derived using an EBITDA multiple, an EBITDA earn-out is the natural choice. You can find more on the derivation in our article on business valuation.

How is an earn-out calculated? A worked example

An earn-out is calculated using a formula set out in the contract, based on the metric and the degree of target achievement. The following example is hypothetical and has been recalculated using Python.

Assumptions: base purchase price €8.0 million. Earn-out over two financial years, with a maximum of €1.0 million per year, giving a total cap of €2.0 million. The metric is adjusted EBITDA. The scale per year:

• Floor (minimum threshold): no payment below €1.6 million EBITDA
• €1.6 million to under €1.8 million: 40 percent of the annual amount
• €1.8 million to under €2.0 million: 70 percent of the annual amount
• €2.0 million or more: 100 percent (cap per year)

In scenario C the cap applies: exceeding the target does not increase the earn-out any further. In scenario A the floor applies in the first year. A scale prevents all-or-nothing effects, but at each step it creates an incentive to steer results to just above or just below the threshold.

What belongs in an earn-out clause?

A robust earn-out clause governs above all how the metric is determined and what the buyer may do during the term. CMS and Rödl & Partner identify unclear definitions and calculation bases as the main causes of later disputes. These points belong in the contract:

Acceleration clauses are widespread: according to SRS Acquiom, almost 25 percent of US deals outside life sciences between 2014 and 2023 included acceleration on a change of control. The clause should be negotiated early, ideally already in the letter of intent.

What risks does the seller bear with an earn-out?

The seller’s main risk: they give up control but remain economically exposed to the result. The buyer can allocate costs, bring investments forward or shift customers to other group companies. In addition, there are credit and dispute risks.

Check during due diligence how the buyer manages subsidiaries and allocates costs. This article does not replace legal or tax advice. Have the clause reviewed by specialist lawyers and tax advisors.

How is an earn-out taxed in Germany?

Under the established case law of the German Federal Fiscal Court (Bundesfinanzhof, BFH), an earn-out is only taxed in Germany when it is realised, not in the year of sale. In principle, the capital gain arises at the time of disposal. For profit- or revenue-linked purchase price claims, however, the BFH looks to the realisation of the consideration (BFH, judgment of 19 December 2018, I R 71/16). For a selling corporation, this means: the earn-out instalments are disregarded under § 8b (2) KStG in the year in which they are received, with 5 percent treated as non-deductible business expenses.

For the sale of a partnership interest, the BFH followed up in 2023 (judgment of 9 November 2023, IV R 9/21). Earn-out payments that are uncertain as to whether and how much will be paid do not increase the capital gain in the year of sale. They are to be recognised on receipt as subsequent business income. According to Deloitte, the preferential tax rate for capital gains does not apply to them.

For you as the seller, this means: allowances and reduced tax rates may in some circumstances only apply to the fixed portion of the purchase price. The structure of the earn-out therefore affects your net proceeds. Clarify the tax treatment with your tax advisor before the contract is finalised.

What alternatives are there to an earn-out?

The most important alternatives are the vendor loan and rollover equity. Both defer payment or share risk without linking the purchase price to a metric.

• Vendor loan: the seller defers part of the fixed purchase price in return for interest. The amount is fixed; the risk lies in the buyer’s creditworthiness.
• Rollover equity: the seller reinvests part of the proceeds in the acquiring company and benefits on a later exit. This is customary above all when selling to investors.

The instruments are often combined, for example a moderate earn-out with a vendor loan.

What should your next step be with an earn-out?

First clarify how large the valuation gap is and which metric you can realistically influence. Then run through scenarios and define your minimum requirements for security and control rights. If you are preparing the sale of your company, we will be glad to discuss your starting position in a confidential initial meeting. You can find more about how we support you under sell-side advisory.