Earn-outs are back: write the accounting definitions before the dispute

Earn-outs are bridging this year's valuation gaps again. In our experience the dispute is rarely about performance. It is about an EBITDA definition the SPA left open.

Buyers and sellers are still some way apart on price. Andersen's review of European M&A in the first quarter of 2026 again names valuation gaps as the main obstacle, especially in the mid-market. The ECB's 25 bp rise on 11 June, its first increase since 2023, will not bring the two sides closer.

The data show what parties are doing about it. The CMS European M&A Study 2026, covering 601 deals signed in 2025, finds an earn-out in 27% of them, against a ten-year average of 23%. Earn-outs were most common below €25m of deal value. In 55% of them the metric was EBIT or EBITDA, up from 47% the year before. In SRS Acquiom's 2026 study of US private deals, the median earn-out was worth 34% of the closing payment. SRS's claims data also show that, across all deals with an earn-out, only about 21 cents per dollar of the maximum has been paid.

So more price now depends on an EBITDA figure that someone will calculate two years after closing. The case below is a composite, but every element of it comes from files we have worked on.

The case

A founder sells a business services group for €36m on a cash-free, debt-free basis, plus an earn-out of up to €8m. The full €8m is due if FY2027 EBITDA reaches €6.0m, with linear payment from €5.0m. The founder stays on as managing director. The SPA defines EBITDA as "earnings before interest, tax, depreciation and amortisation as shown in the audited accounts of the Company, prepared in accordance with French GAAP consistently applied."

In early 2028 the buyer reports EBITDA of €4.9m, so nothing is due. The seller's team calculates €6.3m. Here is the €1.4m gap:

None of these items is about how the business performed, and each one could be defended under French GAAP. Everyone at the table knew the definition was loose. Nobody wanted to reopen the price discussion two days before signing to fix it.

1. Define EBITDA from the due diligence, not from "the accounts"

"As shown in the accounts" sounds neutral. It is not. After closing, the buyer controls the accounts, and "consistently applied" does not say consistent with what.

The parties already have a better reference: the quality of earnings work in the FDD or VDD. It sets out reported EBITDA, every adjustment and the accounting policies behind them, and both sides have discussed it line by line. We recommend that the SPA define earn-out EBITDA as follows:

• Start from the FY2025 adjusted EBITDA in the due diligence report and attach that bridge as a schedule.
• List the policies that must not change during the earn-out period: revenue recognition, WIP and stock valuation, capitalisation thresholds, provisions, bonus accruals.
• State which DD adjustments are carried forward (for example the owner's salary normalised to market rate) and which are not.
• Exclude purchase accounting effects, transaction costs and the costs of any decision the buyer makes on its own.
• Attach a worked example: the FY2025 calculation run under the earn-out definition. If both sides cannot reach the same figure from it, the definition is not finished.

In the case above, this would have dealt with the last two lines of the table on its own. The seller could argue that the Commercial Code already requires methods to stay the same from one year to the next (article L.123-17). That argument would have to be made in front of an expert, which is exactly the situation a clear definition avoids.

2. Integration and cost allocation: where the money goes

The first two lines of the table are the usual source of conflict, and the buyer can act on them in good faith. The buyer bought the company to integrate it. Integration costs money, and group overheads have to be allocated somewhere.

The SPA has to choose. Our usual drafting:

• Management fees and recharges. Either no fees are recharged, or they are capped at the pre-closing level of the services they replace (for example the cost of the outsourced payroll provider). The cap should be a euro amount.
• Integration costs. These are excluded from earn-out EBITDA unless the managing director approved them in writing. They are listed by type: IT migration, rebranding, restructuring, the group's own advisers.
• Revenue transfers. Customers moved to another group entity, or cross-sales made by the group, are either attributed to the company under a set formula or ruled out.
• Operating covenants. The seller will ask the buyer to run the business "in line with past practice". The buyer will refuse to be bound to maximise the earn-out. The usual compromise is that the buyer will not act mainly in order to reduce the earn-out, plus a short list of decisions that need the managing director's consent.

On a €6m EBITDA target, €0.6m of recharges is 10% of the target. Because of the linear scale, it is also enough to cut the payment on a business sitting exactly at target from €8m to €3.2m. Founders should model the sensitivity before signing, not after.

3. Expert determination: what the expert can and cannot decide

Most French SPAs send earn-out disputes to an independent accountant acting under article 1592 of the Civil Code. The parties "make the third party's decision their law". The courts will set the decision aside only for gross error (erreur grossière), for going beyond the mission, which the case law treats in the same way, or for fraud. A gross error is one that a careful professional would not make. A different valuation is not enough (Cass. 3e civ., 19 October 2017, n° 16-22.665). This expert is not an arbitrator and not a court-appointed expert, and the SPA should not mix up the two roles (Cass. com., 18 December 2019, n° 18-14.117).

In practice, this means:

• The expert applies the contract. The expert does not rewrite it. If the SPA says nothing about management fees, the expert must decide what "consistently applied" means. That is a legal question disguised as an accounting one, and both sides will later say it was outside the mission.
• The mission must be specific. List the items in dispute, say whether the expert may decide points of contractual interpretation, set the documents and the timetable, and say whether the expert can only choose between the parties' figures or reach a figure of their own.
• Information rights are part of the mechanism. The seller needs access to the ledgers, the recharge contracts and the auditors' work papers during the earn-out, not only after the earn-out statement is delivered.
• The decision is hard to challenge. That is the point of the clause, and it is also the risk. A loose definition leaves the outcome to one person's judgement, with almost no appeal.

What we tell clients

• Buyers: write down your integration plan before signing and price it into the definition. A cost you plan to recharge, but leave out of the SPA, becomes a dispute you are likely to lose.
• Founders: ask your adviser to calculate the earn-out on last year's figures using the buyer's draft definition. The gap from your own number shows what you are exposed to.
• Both: attach the DD EBITDA bridge, the list of locked policies and a worked example to the SPA. Cap recharges in euros. Define the expert's mission item by item.
• Timing: get the definition settled at heads of terms, together with the price. Leaving it to the last week before signing is how the case above happened.

This note is general information, not advice on a specific transaction.