Earn-out Case Study: M&A Deal Between Real Companies

You will see how earn-outs work in private M&A, not the hype. Earn-outs are a bridge, not a wand, and in 2025 they are a reliability test between buyers and sellers. Data from SRS Acquiom shows 22% of 2024 non-life-science deals included an earn-out (term for post-close payout tied to future performance), and the average payout across all deals wirh earn-outs is about $0.21 per $1 of potential earn-out value. In life sciences, median earn-out payments were about 61% of total deal value over 2014-2023. That shows where risk and leverage sit by sector and revenue certainty.

Let’s start with the practical setup. An earn-out ties a portion of the sale price to post-closing performance. Buyers fret about overpaying for uncertain future results; sellers push for upside if the target performs beyond forecasts. You’ll commonly see earn-outs linked to EBITDA, revenue milestones, regulatory approvals, or product milestones. In lower middle-market deals, the typical earn-out shares are 15%-30% of the purchase price, but it can top 50% in high-uncertainty scenarios.

The flip side is stark: fewer than 60% of deals with earn-outs actually pay out, at an average of 21 cents on the dollar. Those numbers influence negotiation dynamics and require precise definitions up front.

From a governance perspective, disputes arise not over outcomes, but measurement. Ambiguities in performance metrics, milestone definitions, or post-acquisition integration plans are the breeding ground for litigation. Delaware courts, where many large private deals end up, have seen a steady uptick in earn-out disputes as calculation periods run their course. That requires crisp language on measurement methodologies, calculation dates, and how to treat disputed adjustments or changes in accounting policy.

Two real cases illustrate the risk and the mechanics. In Fortis Advisors v. Dematic Corp., the court sided with the seller because the earn-out clause left a critical term undefined: “Company Products.” The result was a multimillion-dollar judgment for the seller and a reminder to codify product scope, revenue streams, and related milestones clearly. On the other side, Medal v.

Beckett Collectibles, the dispute started as a dispute over an acceleration clause in an SPA, but the court allowed the dispute to proceed due to ambiguous acceleration language. These are not isolated quirks; they reveal the operational consequences of vague deal language.

Now, a practical case study to learn from. Fortis Advisors, acting as the seller’s representative, closed with Dematic on a framework that included an earn-out tied to net revenue milestones for a defined product line. The deal contemplated a substantial earn-out, with a potential payout in the hundreds of millions if revenue targets were met over a four-year period. The drafting defined revenue milestones precisely in aggregate terms (but it did not map those milestones to a defined universe of “Company Products” or the exact revenue attribution methodology). When Dematic faced revenue shortfalls and disputes about what counted toward the earn-out, the contract language failed to resolve those questions cleanly. The result was a multimillion-dollar judgment for the seller, reinforcing the point that the scope of products and the attribution of revenue need to be crystal clear. For you, that means ensuring your scope, attribution, and exclusions are non-negotiable in the SPA and in the earn-out schedules.

In a different thread, Medal v. Beckett Collectibles centers on acceleration provisions in non-life-science deals. The seller argued that a change-in-control event should trigger accelerated earn-out payments. The court’s decision to allow the dispute to proceed underscored how ambiguous acceleration language can expand or restrict earn-out timing in ways not anticipated by both sides. The takeaway here is simple: if you want to control timing risk, spell out the conditions for acceleration, the interplay with change of control, and the consequences if the buyer asserts reinterpretation or delay.

A practical case study to learn from

What does a robust earn-out structure look like in practice? Start with three guardrails:

1. Define the performance metric with surgical precision. If you are using post-closing EBITDA, specify add-backs, FX effects, one-time items, and the accounting policy alignment. If revenue is the target, specify the revenue universe, channel assumptions, and what counts as revenue, how you treat refunds, returns, and wholesale discounts. The more you define in the contract, the less space for disputes later.
2. Tie milestones to auditable, independent measures. Use independent auditors or a pre-agreed calculator. This minimizes disputes about subjective judgments and keeps the process transparent for both sides. Include a fallback mechanism for disputed calculations, with a defined timeline for resolution.
3. Address change of control and integration. For non-life-science deals, where acceleration on change of control is common (about 25% in 2014-2023 data), spell out whether acceleration happens automatically or under gatekeeping conditions. Also, plan for post-closing integration: who bears what cost and who has decision rights related to the earn-out’s performance drivers?

A realistic look at deal economics helps you think through leverage and risk. The overall transaction multiples across 2022-2024 averaged 9.8, down from 11.9 in 2016-2021. With lower multiples, buyers lean more on earn-outs to bridge valuation gaps, while sellers push for higher certainty and stronger protection on earn-out mechanics.

The 2024 data show earn-outs paid about 21 cents on the dollar on average, underscoring that many earn-out opportunities end without a full payout. That reality should shape negotiation posture: you need defensible, clear metrics and a robust dispute-resolution path baked into the SPA.

Another layer is the deal environment. The market’s steady reliance on earn-outs in 2025 reflects ongoing uncertainty. Data sources from Harvard Law and White & Case emphasize that earn-outs remain a common, necessary tool to close deals despite volatility. You will notice a split between sectors: life sciences use larger earn-outs tied to milestones due to longer development cycles and regulatory hurdles, whereas other sectors rely on earn-outs to bridge valuation gaps in mid-market deals. The SRS Acquiom 2025 Deal Terms Study analyzes more than 2,200 private-target acquisitions, highlighting that earn-outs persist as a strategic mechanism to align incentives during post-closing execution.

If you are structuring or negotiating an earn-out, use a practical, testable checklist. First, map every metric to a precise accounting treatment and a concrete data source. Second, fix the measurement period, cadence, and the timing of payout opportunities, with clear definitions of what happens if numbers are subject to adjustment.

Third, set a dispute mechanism with a neutral third-party arbiter, a defined resolution window, and a path to interim payments if performance is verified mid-period. Fourth, consider acceleration provisions only after you have tested the implications across a few hypothetical outcomes and you have secured protection for both sides in a change of control scenario.

From a buyer’s perspective, earn-outs reduce upfront risk but shift execution risk to the buyer’s post-closing team. You will want a governance clause that ensures the seller remains engaged enough to hit milestones, while protecting the buyer from creeping post-closing costs or misallocation of resources. From the seller’s side, the appeal is upside, but the probability of payout is uncertain, given the historical data. The 60% figure for payout incidence is a stark reminder: you need a robust plan for what happens if targets are not met, including whether partial payouts are possible, and how to handle disputed value.

Let’s translate this into a real-world action plan you can take into your next deal. If you are advising a seller, push for a clearly defined product scope, explicit revenue attribution, and a hard cap on adjustments that can reduce earn-out payments.

If you are advising a buyer, push for a granular measurement framework with a defined dispute process, and demand strong anchors around post-closing integration costs and the governance framework that preserves the earn-out’s integrity. And for both sides, insist on a tailored, deal-specific appendix that codifies every metric, every calculation method, and every contingency, down to the smallest item.

Key takeaways you can apply now

• Earn-outs are common but not a guarantee. In 2024, 22% of non-life-science deals had earn-outs, and payouts occurred in fewer than 60% of cases, averaging about $0.21 for each $1 of potential earn-out value. Use that as a baseline in negotiations to calibrate expectations and risk.
• Sector matters. Life sciences feature larger, milestone-driven earn-outs with higher total potential, while other sectors use earn-outs to bridge valuation gaps in mid-market deals. Adjust metrics and milestones to reflect sector-specific dynamics.
• Define metrics, not vibes. The Fortis Advisors v. Dematic case shows the cost of leaving critical terms undefined. Clear definitions of “Company Products,” revenue attribution, and related milestones are non-negotiable.
• Acceleration is not automatic. About 25% of non-life-science deals include acceleration on change of control, but you should define when and how acceleration happens to avoid post-closing disputes.
• Delaware litigation is a reality. Expect disputes to surface during calculation periods. Build a dispute-ready framework into the SPA, including timelines, independent verification, and a path to interim payments if performance is verifiable.

If you want to go deeper, start with the practical glossaries and templates for earn-out structures in our next internal briefing. Review the SRS Acquiom Deal Terms Study and the Whiteford and White & Case analyses to see how deals are evolving in 2025. And if you are drafting or negotiating an earn-out in a private company deal, consider a live review with a precision checklist to ensure you have covered measurement, pricing, and post-closing governance.

In the end, earn-outs do not replace diligence; they complement it. They align incentives, but only if you lock in the mechanics. Trust me, the right structure saves you from disputes and preserves value for both sides when the numbers are tallied.

If you are looking for more concrete steps, I can walk you through a line-by-line vetting of an earned-out appendix and tailor it to your deal structure. This approach supports your next M&A move.