COREDO – EU Legal & Compliance Services Expert legal consulting, financial licensing (EMI, PSP, CASP under MiCA), and AML/CFT compliance across the European Union. Headquartered in Prague, we provide seamless regulatory solutions in Germany, Poland, Lithuania, and all 27 EU member states.
Alena Sharykava
04.04.2026 | 6 min read
Updated: 04.04.2026
Since 2016 I have been handling deals related to company registration, licensing, and M&A support in Europe, Asia, and the CIS countries. During this time the COREDO team has repeatedly designed and defended earn-out agreements in the Czech Republic and Slovakia, in Cyprus and Estonia, in the United Kingdom, Singapore, and Dubai. In this article I will systematically lay out how to sensibly apply earn-outs, which KPIs actually work, how to document payment mechanisms, where deals “break down”, and which legal and financial instruments prevent that.
I write for owners, CEOs, and CFOs who need a reliable, comprehensive approach: from choosing a jurisdiction and a financial license to building AML frameworks and integrating ERP for KPI verification. A subtle point: an earn-out delivers brilliant ROI when properly structured. But it also carries legal risks and tax consequences if the calculation methodology, rules for accounting for the earn-out in reporting, and dispute-resolution scenarios are not thought through.
When and why to use an earn-out
Applying an earn-out makes sense, when a business valuation heavily depends on future results: a fast-growing SaaS, payments fintech, niche manufacturing, or a service company with an unestablished LTV. In such cases, deferred consideration and performance-based consideration align the parties’ expectations and reduce the buyer’s risk of overpayment. The seller gets the opportunity to “take” part of the value they are confident of creating in the post-closing period, while the buyer hedges with KPI formulas and clear verification.
COREDO’s practice confirms that earn-outs are especially useful in cross-border deals, where information asymmetry is higher than on the local market. A clear structure of earn-out payments, agreeing accounting policies already at the SPA stage, and setting up post-closing governance help here. If you add independent KPI verification and adequate restrictions on changing the business during the earn-out period, conflict decreases sharply and trust grows.
ROI and NPV of an earn-out deal
When I’m asked about the “advantageousness” of a structure, I start by assessing the earn-out NPV and sensitivity to key assumptions. At COREDO we build discounted cash flows for the earn-out component based on DCF earn-out modeling, and test sensitivity analysis scenarios for revenue, gross margin, churn and operating leverage. This allows the client to see the expected ROI from the earn-out and the thresholds of deviation at which the deal remains profitable.
I tell clients honestly that uncertainty is not the enemy if it is quantified. When the vendor and buyer look at the same NPV table and see how earn-out payment mechanisms respond to KPIs, negotiations become substantive. It is critical that the earn-out calculation methodology be written into the SPA, not left in a file “for internal use”.
Real options valuation and Monte Carlo
In a number of deals in Singapore and the United Kingdom, a solution developed at COREDO included real options valuation for the earn-out: the seller was granted the right to an additional milestone upon achieving an NRR target, and the buyer the right to postpone the deadline in case of a regulatory delay of a license. We supplemented this with a Monte Carlo simulation, modeling the distribution of revenue and EBITDA, taking into account seasonality and currency fluctuations.
Key point: record the simulation parameters in the SPA: ranges, data sources and verification rules.
Earn-out structure and payout mechanisms
No off-the-shelf design exists, but there are proven frameworks. In Europe and the UAE a hybrid is more common: a fixed upfront plus a milestone payments scheme based on revenue or adjusted EBITDA. In fintech and crypto services we add performance-based consideration, where achieving the earn-out financial KPIs is combined with operational triggers, for example obtaining a payment license or integrating core banking.
It is important to agree that the earn-out is precisely deferred consideration, that is part of the purchase price, and not remuneration for work. This affects taxes, earn-out accounting rules, and withholding tax issues. We separate in advance compensation for work under employment/consulting contracts so as not to mix it with the earn-out payment mechanism.
Earn-out payment structure
The milestone model is good when there are binary events: license obtained, ERP implemented, a certain volume of customers migrated. Revenue-based is suitable for a scalable business with a clear funnel, but rules are required for accounting returns, discounts and pro-forma adjustments for new lines.
To avoid manipulation, we fix the method for calculating net revenue, define the source of truth (ERP/BI) and rules for recognition of shipments and returns.
Deferred and performance-based
Deferred consideration is recorded as part of the price and paid upon achievement of KPIs; performance-based is broader: it includes both KPIs and qualitative integration milestones. In many SPAs we build a mix: 70% formula-based on adjusted EBITDA, 30% on operational earn-out KPIs. That balance reduces the temptation to “massage” purely financial metrics by underinvesting in the product.
I recommend providing a holdback/escrow in case of disputes over metrics and a clear procedure for independent expert determination. This eliminates the risk of “locking” the entire price into the earn-out and then arguing indefinitely. Escrow helps discipline the parties and speeds up closing.
Earn-out terms and early payment
Clearly describe triggers for earn-out payments: which metric is used, the measurement period, the threshold, the interpolation formula between the threshold and the cap. In such cases it is advisable to provide malus and clawback mechanisms if accounting errors or fraud are uncovered.
Early payment is reasonable in long earn-out periods when both parties want to remove dependence on future fluctuations. Then we include an option to purchase the remaining portion of the earn-out using an NPV formula, discounted at the agreed rate and adjusted for the risk of KPI non-performance.
How to draft KPIs for an earn-out
You can’t “pick” KPIs without operational analysis. My team always starts with unit economics and revenue quality, then aligns KPIs with the client’s reporting system. If KPI verification in an earn-out relies on spreadsheets without ERP integration — expect disputes. At COREDO we connect dashboards and BI tools, record report versions and data sources at the SPA level.
When drafting KPIs, use terms, that have unambiguous definitions in the accounting policies. Specify how to measure KPIs in the earn-out: metrics and methodologies, frequency, tolerances, procedures for correcting errors.
Earn-out KPIs: adjusted EBITDA, revenue
Adjusted EBITDA and earn-outs: a classic, but often simplified. In our projects we carefully document permitted add-backs: integration expenses, one-off legal services, force-majeure penalties. Without this the buyer risks “deflating” EBITDA by cutting investments, and the seller risks having to dispute every line-item adjustment.
Net revenue is a good KPI provided there are clear rules: exclusion of intercompany sales, returns, discounts, deferred revenue for SaaS, cut-off by closing dates. Gross margin is useful to prevent aggressive discounting in pursuit of revenue. For transparency I insist on agreeing the working capital adjustment and the closing balance sheet adjustment to eliminate the effect of inventory padding.
Earn-out KPIs: retention, NRR, churn
Customer retention as a KPI sends a clear signal: we are not buying “one-off” revenue. For services we often use net revenue retention and churn rate, and for marketplaces, take rate and GMV quality. Unit economics, such as CAC payback and contribution margin, help discipline the team and prevent growth of “empty” revenue.
KPIs for an earn-out for a SaaS company
For SaaS we use ARR/MRR calculations, NRR, logo retention, ARPA, LTV/CAC, gross margin by product lines, and the share of upsell/cross-sell. Mandatory are the rules on deferred revenue and discount policy. We add a cap on changing the pricing structure without approval to protect the metrics.
KPIs in an earn-out for a manufacturing business
In manufacturing we use OEE, yield, OTIF, scrap rate, average production cycle time and defect rate by key SKUs. We link financial KPIs to adjusted EBITDA and cash conversion.
KPI review: payment triggers and timelines
Triggers should be binary in logic and continuous in formula: either the milestone is reached, or there is interpolation between the minimum and maximum payment. Timeframes: 12–36 months, depending on the business cycle and regulatory approvals. I recommend including a “cure period” window to fix accounting errors and mechanisms to extend the deadline in case of force majeure.
To avoid arbitration over every change, we establish an independent expert determination with a narrow mandate: to confirm that the conditions for review have been met.
Restrictions and retention in an earn-out
It is important for the buyer to preserve a “conditionally static” environment for meeting the KPIs. We draft covenants: you may not change pricing policy above/below certain thresholds, shut down sales channels, dispose of key assets or change accounting policies without consent. Retention of key employees during the earn-out is a separate section: key-man retention clauses, bonuses with malus, non-compete and non-solicit.
Verification of KPIs and protection of the parties
Verification is a data architecture. In COREDO deals we establish data integrity and the source of truth: which systems are primary, how versions are recorded, who has access to the dashboard. ERP integration for KPI is a mandatory element, not a «bonus», because without it you will not be able to prove the correctness of calculations.
ERP and BI control and reporting methods
A good practice is monthly operational reports and quarterly KPI «snapshots». We configure dashboards and BI tools so that KPI metrics are calculated automatically, with change logs and locks against backdating. We use «four-eyes» procedures to approve key reports and an access control checklist.
QoE audit and forensic audit
Quality of earnings (QoE) before the deal is a must-have; it cleans metrics of irregular effects. In a number of deals in the EU and Dubai we included the right to a forensic audit in case of suspected KPI manipulation. This is not a «threat», but insurance for both parties to remove doubts and move forward.
For KPI verification we invite an independent auditor appointment or third-party verification providers. Their role is to check the methodology, not to hunt for «errors at any cost». The approach only works when their powers, timelines and the format of the conclusion are fixed in the SPA.
Arbitration and escalation
I adhere to the principle «quick technical solution via an expert, legal dispute via arbitration». Therefore, in the SPA we split the dispute matrix: technical disagreements on KPI — independent expert determination; legal: arbitration clause and seat.
Legal risks of an earn-out in an SPA
An earn-out adds a separate «world» to the SPA: a schedule of metrics, reporting, covenants, access rights, restrictions and remedies. Best-practice clause drafting includes clear definitions of KPIs, a prohibition on ambiguity, alignment of accounting policies, and rules for adjustments when standards change.
The template annex to the SPA (template clauses SPA earn-out schedule) is a starting point, but we tailor it to the client’s business model. At COREDO I insist on «red teaming» the terms: another subgroup of lawyers “breaks” the draft until it becomes robust.
Governing law and limitation periods
The choice of governing law is a strategic one. English law offers predictability in accounting disputes and respects clearly drafted formulas; continental law sometimes requires more «literalness» in definitions.
Limitation periods for earn-out claims are often shorter than general civil limitation periods. We propose a separate provision tied to the last earn-out reporting date. Deadlock and dispute resolution should be described in detail to avoid getting stuck in endless «approval committees».
Post-closing: adjustments and covenants
Closing balance sheet adjustment and working capital adjustment are critical elements to ensure the earn-out starts «clean». Pro-forma adjustments are necessary for carve-outs and new business lines. Financial covenants limit artificial transactions that affect KPIs: prohibition of non-commercial discounts, changing counterparties within the group without a market price, accelerated capitalization of expenses.
Employee options, escrow and clawback
Escrow and retention of funds are a practical tool for payments at the end of the period or in tranches. Clawback and malus protect the buyer from «fabricated» results, while giving the seller confidence that bona fide achievement of KPIs will be paid. Put and call options in the SPA help to buy out the remaining part of the earn-out early according to the formula.
Anti-dilution provisions are important, if the deferred payment is partly in shares. Non-compete and non-solicit: basic, but don’t overdo it: courts dislike excessive restrictions.
Accounting and tax consequences of earn-outs
Tax characterization is the first question after structure. In most jurisdictions an earn-out is part of the purchase price; but if drafted carelessly, tax authorities may reclassify payments as salary or a service. Our task: to design the tax structuring of cross-border transactions so as to minimize double taxation and avoid unexpected withholding tax.
IFRS and GAAP: accounting for earn‑outs
IFRS: under IFRS 3 contingent consideration is recognized at fair value at the acquisition date.
US GAAP (ASC 805) similarly requires initial recognition at fair value and subsequent remeasurement for liabilities. For the seller, the consequences depend on whether the income is recognized as part of gains on sale or as operating income; this is determined by the structure and the seller’s role post-closing. We model accounting rules for the earn-out in both parties’ financial statements in advance so CFOs are not surprised after closing.
How to reduce tax risks
Tips for minimizing tax risks with an earn-out include: documenting the “price” nature of the payments, avoiding mixing them with compensation for work, accounting for WHT in source countries, checking the application of DTT, and synchronizing payment timing with tax periods.
In a cross-border earn-out we calculate foreign exchange effects and fix the settlement currency, as well as the hedging rules. It’s a simple step that removes the question “who pays for the FX difference”.
Regulatory issues and AML: cross-border earn-out
Regulatory restrictions on cross-border M&A affect not only antitrust, but also licenses: payments, forex, cryptoasset services. In COREDO projects in Singapore and Dubai we combined the earn-out with obtaining financial licenses and AML consulting: compliance and AML risks directly affect KPIs and verification timelines.
How to calculate the final payout
The earn-out calculation methodology is the formulas plus the data sources and responsibility for each operation. In the SPA we include the mathematical formulas for calculating payments with the definition of all variables: periods, thresholds, “cap” and “floor”, KPI weights and “carry-over” rules in case of partial fulfillment.
How to protect against fraud and manipulation
How to assess fraud and KPI manipulation? We identify red flags (unusual discounts, a spike in returns after the period, changes to cut-off, “manual” transactions), describe the right to a forensic audit and procedures for suspension of payments. What guarantees should be requested for a cross-border earn-out? Representations regarding data integrity, compliance with accounting policies, and the absence of third-party side-letters with clients.
COREDO cases: examples
I value practice more than theory, so three short case studies will show how the COREDO approach works across different jurisdictions and industries. Formulas and names have been changed, but the logic is preserved.
NRR and ARR in an Estonian SaaS
Client, B2B SaaS with ARR around 6 million, deal with a buyer from the UK. Earn-out over 24 months: 60% based on net revenue retention (threshold 110%, cap 120%), 40% based on ARR growth (revenue growth KPI, cap 30%).
Asset in Slovakia: EBITDA adjustments and QoE
Manufacturing of components for machinery, earn-out over 18 months, basis: adjusted EBITDA with clear add-backs. We added operational KPIs: OTIF >95% and a reduction in scrap rate by 2 percentage points.
Payment fintech in Singapore and Dubai
Cross-border earn-out, where part of the payments depended on obtaining payment service licenses and complying with AML. We included milestone payments for obtaining a license from MAS and registration in a Dubai free zone, and financial KPIs: merchant NRR and transaction turnover, with a restriction on changes to the business model.
This reduced regulatory risk, accelerated approvals, and allowed the early-payment conditions to be triggered.
COREDO earn-out roadmap
To prevent the earn-out from becoming an “end in itself”, you need a roadmap. I prefer a step-by-step method with clear timelines and accountable parties.
Steps, timelines and roles
- Pre-deal analysis: unit economics, QoE, selection of KPIs, sensitivity analysis and DCF modelling of the earn-out.
- Legal architecture: key SPA provisions on the earn-out, template clauses, governing law, arbitration clause and seat, escrow/clawback.
- Systems and data: ERP integration for KPIs, dashboards, access rules, data integrity.
- Taxes and accounting: IFRS/GAAP, tax structuring, WHT, transfer pricing, legal opinion.
- Post-closing: governance, board observer rights, reporting, integration roadmap, escalation procedures.
This framework provides transparency both to those signing the SPA and to those who will live with the KPIs. It saves time, money and nerves, and most importantly – preserves trust between the parties.
Differences between OKRs and KPIs for the team
OKRs are about ambition and focus; KPIs are about measurement and payouts. In an earn-out I don’t mix them: OKRs help management see the “big goal”, but earn-out payment triggers should be based on KPIs.
Conclusions
Earn-out: a tool for fine-tuning the deal price, not a “psychological premium”. It works when there are clear KPIs, transparent payment mechanisms, agreed accounting policies, a strong data architecture and well-thought-out legal protection. My experience shows: the more thoroughly the parties spell out the calculation methodology, data sources and dispute-resolution procedures, the less often they have to argue.
At COREDO we view an earn-out as a project: from choosing jurisdiction and licenses to AML compliance, ERP integration, IFRS/GAAP accounting and arbitration clauses. This combination gives entrepreneurs transparency, saves time and protects value. If you are preparing a cross-border earn-out or want to “break down” an existing structure into risks and opportunities, engage our team: practical solutions and careful implementation are exactly the reliable path that continues to work even after the SPA is signed.