Earnout in tech disposals: mechanism, calculation and risks for the seller

The earnout is a contractual mechanism whereby part of the sale price is conditional on achieving defined post-closing objectives. It is used in 35–45% of European mid-market SaaS transactions (source: Hampleton Partners 2025) as an interest-alignment tool between seller and acquirer, particularly when valuation is disputed or when the acquirer wants to secure the operational transition.

Why acquirers propose earnouts

From the acquirer's perspective, the earnout serves three functions: (1) reduce valuation risk on an asset with uncertain future metrics (fast-growing asset but short history); (2) align the seller's interests with post-closing performance (if the founder stays involved); (3) finance part of the price with the asset's future cash flows rather than own capital or debt. From the seller's perspective, the earnout is a bet on the future, it must be negotiated rigorously.

Calculation mechanisms: ARR, EBITDA, growth

• ARR-based earnout: most common in SaaS. Example formula: if ARR at 12 months post-closing exceeds X€, the seller receives an additional Y€. Advantage for seller: ARR is a measurable and hard-to-manipulate metric. Risk: if the acquirer changes pricing policy post-closing, ARR can be impacted without the founder's fault.
• EBITDA-based earnout: the acquirer pays a supplement if post-closing EBITDA reaches a threshold. Very risky for the seller as the acquirer controls post-closing costs, they can increase charges (management salaries, group services) and artificially reduce EBITDA.
• Growth-based earnout (% YoY): conditional on achieving a target growth rate. Problem: if the acquirer slows commercial investments post-closing, growth slows and the seller does not receive their earnout.

How to negotiate an earnout favourable for the seller

• Require objective non-manipulable metrics: prefer net ARR of distribution commissions (strict definition in the SPA) over EBITDA or gross revenue.
• Negotiate operational safeguards: clause preventing modification of pricing policy without seller agreement during the earnout period, obligation to maintain commercial spending at a minimum level.
• Limit duration to 12–18 months: earnouts longer than 24 months are traps for the seller. The longer the duration, the more uncertainty grows and the more levers the acquirer has to influence performance.
• Cap and protect with a floor: negotiate a minimum guaranteed earnout amount (floor) regardless, and a cap to give the acquirer visibility on their maximum exposure.

Classic pitfalls to avoid

The most common trap is the EBITDA earnout in a structure where the acquirer recharges group services (IT, HR, legal, finance) to the acquired entity. These group recharges can artificially inflate costs and reduce EBITDA below the earnout threshold. The second trap is an earnout without a dispute resolution mechanism: if the acquirer and seller disagree on the calculation, the absence of an independent expert designated in the SPA transforms the dispute into an 18–36 month judicial procedure.