An earn-out makes part of the price contingent on post-completion performance over 1–3 years. It bridges valuation gaps — and breeds disputes, because the buyer controls the metric once the deal closes.
Most price negotiations end in one of three places: a number, a bridge, or a walk. The bridge — contingent consideration — is where drafting either earns its fee or funds a dispute two years later.
When an earn-out is the right tool
Earn-outs make sense where the value genuinely depends on things that haven't happened yet: a pipeline converting, a licence landing, a key contract renewing. They make much less sense where the gap is really about trust in the historic numbers — that is a diligence and warranty problem, better solved with a price adjustment or fixed deferral than a performance bet.
The metric decides everything
| Metric | For | Against |
|---|---|---|
| Revenue | Hard to manipulate | Ignores profitability; invites bad sales |
| Gross profit | Balances both | Needs tight cost definitions |
| EBITDA | Reflects real performance | Highly manipulable post-completion |
| Milestones | Objective, binary | All-or-nothing cliff risk |
The buyer controls the accounts after completion. Group management charges, restructuring costs and policy changes can crush an EBITDA earn-out without anyone acting in bad faith. Sellers should push for revenue or gross-profit metrics with accounting policies frozen at completion; buyers should concede clear definitions in exchange for the alignment they're buying.
The seller's protection stack
- Conduct-of-business covenants — run the business consistently with past practice; no diverting customers to group companies; no loading group costs onto the target; no starving it of working capital.
- Information rights — monthly accounts and access during the period.
- Defined calculation & expert determination — an accountant, not a courtroom, resolves the arithmetic.
- Acceleration — the earn-out pays out in full if the buyer sells the business, integrates it beyond recognition, or breaches the covenants.
The alternatives
Fixed deferred consideration — instalments not tied to performance — removes the manipulation problem and leaves only credit risk, coverable by escrow or bank guarantee. Holdbacks secure warranty and indemnity claims. Vendor finance keeps the seller invested through a loan. Where the buyer simply can't fund the full price today, deferral plus security usually beats an earn-out plus a fight.
The tax layer
Individual sellers in the UAE generally take the proceeds — earn-out included — free of personal tax. Corporate sellers within UAE Corporate Tax should model the timing and participation-exemption treatment of contingent payments, and international sellers must check the home-country side, where earn-outs can convert capital gains into ordinary income. Do the tax work while the structure is still movable.
How we help
Neo Legal structures and drafts earn-outs, deferral and security packages on both sides — metric design, covenant suites, expert-determination mechanics and acceleration triggers — as part of our M&A practice.
This article is general information as at July 2026 and is not legal advice. Price structures and tax outcomes are transaction-specific; obtain advice on the deal in front of you.
