What is an earn-out clause in Swiss M&A?

An earn-out is a contingent payment mechanism where part of the purchase price depends on the company's future performance. It bridges the valuation gap when buyer and seller disagree on future prospects. In Swiss M&A, earn-outs represent 15-30% of total deal value on average. ### Technical Explanation #### How Earn-Outs Work The purchase price is split into: 1. Fixed Component (70-85%): Paid at closing, based on current performance 2. Contingent Component (15-30%): Paid over 1-3 years, based on achieving agreed targets #### Common Earn-Out Metrics * Revenue targets: Simplest but gameable through discounting * EBITDA targets: Most common, aligns with value creation * Gross margin: Used when revenue growth might compress margins * Customer retention: For service businesses with key client relationships * Milestone-based: Product launches, regulatory approvals, geographic expansion #### Swiss-Specific Considerations * Tax treatment: Earn-out payments received by a private seller are typically tax-free capital gains (same as the fixed price), provided the earn-out is structured as additional purchase price rather than employment income * Accounting treatment: Buyer records estimated earn-out as a liability under Swiss GAAP * Interest: If earn-out payments exceed 1 year, consider present-value discounting #### Typical Swiss SME Earn-Out Structure * 75% at closing (based on trailing 12-month normalized EBITDA × agreed multiple) * 12.5% after Year 1 if EBITDA ≥ 90% of target * 12.5% after Year 2 if EBITDA ≥ 90% of target * Cap at 110% of target (no unlimited upside) * Floor at 80% (proportional reduction below threshold) #### Risks for Sellers * Buyer controls operations post-closing and can suppress EBITDA * Definition disputes: what counts as 'EBITDA' post-acquisition? * Buyer may invest heavily (reducing short-term EBITDA) to grow long-term * Integration costs charged to target company P&L