Earn-outs and staged sales in M&A transactions

When a buyer and seller cannot agree on a company’s value, earn-outs and staged sales can help break the deadlock and complete the transaction. By sharing risk and bringing the parties’ expectations closer together, these mechanisms can make deals possible where a conventional sale would struggle.


An earn-out defers part of the price and makes payment conditional on the company’s future performance against agreed criteria and targets. In a staged sale, ownership is transferred gradually. In both cases, the buyer gains time and information before paying the full price or acquiring the entire stake, while the seller retains the possibility of receiving more than in an immediate sale.


These mechanisms are particularly useful when financial forecasts are unreliable, the business depends heavily on the seller’s personal expertise, customers are highly concentrated, or other uncertainties affect valuation. They can also address the seller’s concerns about the buyer’s financial or managerial ability to complete the deal.


This flexibility brings risks. Unclear metrics, ambiguous performance criteria or poorly defined responsibilities can lead to disputes and jeopardise the transaction. Targets, calculation methods, verification mechanisms and the consequences of meeting or missing them must therefore be set out precisely.


Successful structures require a multidisciplinary approach. Early financial, tax, legal, commercial and technical due diligence helps identify risks and establish suitable terms. Financial monitoring of the earn-out and clear contracts are equally important in reducing uncertainty throughout the transaction.
Portuguese law allows the price to be determined later, provided it is based on objective, verifiable criteria and does not depend on one party’s unchecked discretion. Contractual freedom also allows the parties to adjust the transaction itself, including through put and call options linked to performance targets.


Tax adds another layer of complexity. The treatment of a contingent or staged price must be assessed from both the seller’s and the buyer’s perspectives, taking account of the applicable personal or corporate income tax rules and when the final amount becomes known.


During the measurement period, the parties must also define access to information, decisions requiring mutual consent and procedures for resolving disagreements. These contractual safeguards should protect the seller without unduly limiting the buyer’s ability to manage the company.


When well structured, earn-outs and staged sales share risk, bring positions closer and preserve the business’s potential upside. Their success depends on clear rules, reliable information and trust between the parties.