What is an earn-out?
An earn-out is a deferred payment mechanism in an M&A transaction: part of the purchase price is paid only if the target hits agreed post-closing milestones, typically revenue, EBITDA, customer retention or product launches. Buyers use it to bridge valuation gaps and keep founders motivated; sellers accept it to defend a higher headline price.
How earn-outs work in practice
The commercial fight is rarely about the percentage. It is about measurement and control. The share purchase agreement must define the metric with accounting precision, fix the measurement period, and, critically, constrain how the buyer runs the business during that period. A buyer who cuts the marketing budget or reallocates customers can make any revenue target unreachable. Well-drafted earn-outs therefore include operating covenants, information rights, an acceleration clause if the buyer breaches or sells the business again, and a fast dispute track, usually expert determination by an independent accountant rather than full arbitration.
Earn-outs under Turkish law
Turkish law allows deferred and conditional price freely under the Code of Obligations, and earn-outs are now standard in Turkish tech M&A. Tax treatment needs planning: for a Turkish resident individual seller, characterisation and timing of the earn-out payment affect income tax exposure, and for corporate sellers the participation exemption calculus. Şirket satışlarında the earn-out is part of the share transfer price; documenting it clearly in the SPA and in the closing accounts avoids both tax surprises and later disputes. If the sellers stay on as managers, keep the earn-out separate from salary so it is not recharacterised as employment income.
What metrics work best in an earn-out?
Revenue is harder to manipulate than EBITDA but easier to inflate with low-quality sales; EBITDA reflects profitability but depends on accounting policies the buyer controls. Many deals use revenue with a margin floor, or non-financial milestones such as regulatory approvals or product releases, which are binary and dispute-resistant.
How long should the earn-out period be?
Market practice is one to three years. Longer periods increase the risk that business changes, integration and personnel turnover make the original targets meaningless. If the strategic plan needs more time, staged milestones with annual payouts work better than a single distant test.
What happens if the buyer sells the company during the earn-out?
Without protection, the earn-out can evaporate. Sellers should negotiate acceleration on change of control, on integration that makes the metric untrackable, and on material breach of the operating covenants.
Related terms: SPA, due diligence, escrow.
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