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Term · Capital Measures & Financing

Earn-out

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In briefAn earn-out is a component of the purchase price paid only when certain operational or financial targets are met after an acquisition. For small caps it bridges valuation uncertainty but creates balance-sheet and integration risks.

Definition

A component of the purchase price paid only when certain operational or financial targets are met after an acquisition.

How it is calculated

Formula. Earn-out = contingent payment dependent on revenue, EBITDA, milestones, or other KPIs.

Why it matters for small caps

In the small-cap segment, earn-outs are often used in acquisitions to bridge valuation uncertainty; at the same time, balance-sheet and integration risks arise.

Common misreadings

  • It is presented as a cheap acquisition; if targets are met, the actual purchase price can rise significantly.

In the process

→ Used in Step 6 – Portfolio & monitoring

Frequently asked

What is an earn-out?
It is a contingent, performance-linked additional payment on the purchase price. It only falls due if agreed targets are met.
What is an earn-out tied to?
Common targets are revenue, EBITDA, or operational milestones. The payment depends on whether these metrics are achieved.
Why can an earn-out increase the purchase price?
An acquisition initially appears cheap, but if targets are met the actual price rises significantly. The low initial price is then easily misleading.

Related terms

AcquisitionGoodwillContingent Liability

Sources

Primary
Bundesministerium der Justiz – Aktiengesetz (AktG)
https://www.gesetze-im-internet.de/aktg/
Methodology
EUR-Lex – EU-Prospektverordnung, Verordnung (EU) 2017/1129
https://eur-lex.europa.eu/eli/reg/2017/1129/oj
Category: Capital Measures & Financing · M&A & Structural MeasuresRelevance: AdvancedJurisdiction: International

Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.