Earn-out clause (usually also used in German, more rarely earnings-related agreement)

A widespread form of contract (drafting of a contract), particularly in the case of company acquisitions, according to which – initially – only part of the purchase price is paid immediately. The amount of the remaining sum depends on the development of the earnings of the acquired company within a specified period of time. – If these are above a certain amount specified in the purchase agreement, the acquirer pays a premium on the outstanding installment of the purchase price. – However, if the earnings are lower, the installment is reduced. – In addition to the income, other benchmarks can be used on their own or in a specific combination. – Earn-out clauses in the purchase of securities impose the price risk on the seller during the agreed period. In the course of the financial crisis that followed the subprime crisis, this led to very high losses for banks, funds and special purpose vehicles. Some sellers who had sold financial instruments with earn-out clauses passed on the price risk to other market participants, including private investors, in various ways, including securitization. This also resulted in losses to households along the way. – See Mergers and acquisitions, Purchase price (partial) deferral, Takeover risks.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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