Article / 10 Jun 2025

Put your money where your mouth is: earn-outs

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Gateley Middle East

In the world of mergers and acquisitions, one thing is certain: valuations can get tricky. Earn-outs are designed to bridge the gap between what the buyer is willing to pay upfront and what the seller believes the business is really worth. The use of earn-outs in M&A transactions in the UAE has increased significantly given buoyant market conditions that have arisen, in part, from overseas buyers entering or scaling up in the region.

What is an earn-out?

An earn-out is a portion of the purchase price which is paid to a seller following closure of a sale transaction. These payments are tied to specific, measurable targets such as revenue or profits over a defined period (typically one to three years).

If the business hits those targets, the seller gets paid the remaining portion of the purchase price (or potentially more) and is therefore incentivised to ensure the target business performs. If not, they receive some or none of the remaining portion of the purchase price. It is therefore a win-win or a risk-filled gamble, depending on how the business performs.

Earn-outs are a chance for sellers to get rewarded for the business’s post-sale success. If you believe in the future potential of your company but can’t agree with the buyer on its value, an earn-out lets you earn that extra payout if the company thrives under new ownership. For buyers, earn-outs mitigate immediate post-closing risks around the deal. 

Protect your position 

Examples of how sellers can ensure that their earn-out position is protected include:

  1. Setting clear and objective performance metrics: These targets should be well-defined, measurable and agreed upon by both parties. Whether the metrics are tied to revenue, EBITDA or other key performance indicators, the seller must ensure that these metrics are achievable and straightforward.
  2. Guaranteeing fair management control: Sellers should insist on retaining some level of influence on key operational decisions during the earn-out period. This can include governance rights, such as involvement in major strategic decisions or hiring or firing key personnel. These rights ensure that sellers have some degree of control over the business's direction during the earn-out period.
  3. Setting reasonable earn-out period limitations: The earn-out period should not be excessively long. A long earn-out period can extend the uncertainty of future payouts and increase the risk of disputes. Typically, earn-out periods last between one to three years but this can vary based on the deal structure and business.
  4. Agreeing appropriate dispute resolution mechanisms: Disputes over earn-outs often arise from disagreements about whether performance targets have been met or how the business should be managed. To protect themselves, sellers should include a clear escalation and resolution process in the agreement to prevent expensive disputes.
  5. Setting floors on earn-out payments: In some cases, earn-out payments can be structured with caps (maximum limits) or floors (minimum thresholds). Sellers may want to negotiate a floor to ensure they receive a baseline payment regardless of performance.
  6. Preventing harmful buyer actions: The buyer could take actions that harm the business’s ability to meet the earn-out targets, such as altering key business activities, cutting costs in key areas or changing pricing strategies. Sellers should include provisions in the agreement that prevent the buyer from taking actions during the earn-out period that negatively impact the business’s performance, especially if those actions are aimed at reducing earn-out payments.
  7. Maintaining post-sale reporting and communication: Sellers should ensure regular reporting on key financial metrics and performance indicators. The agreement should require the buyer to provide regular, detailed financial reports (monthly or quarterly) showing how the business is performing against the agreed-upon targets.

The bottom line: are earn-outs right for you?

Earn-outs can be the perfect solution when buyer and seller are at odds over valuation. They provide a way to meet both parties’ needs by offering potential upside for the seller and a safety net for the buyer. But they’re not without risk. To ensure everyone’s on the same page, it’s crucial to clearly define performance targets, operational protections for the seller, payment schedules and dispute resolution processes.

Get in touch

To discuss any of the issues raised in our series, please get in touch with a member of the Gateley Middle East corporate team.

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