We recently wrote a blog post about the legal pitfalls of earn-out arrangements in acquisitions.
But that’s not the end of the story. Together with Branka Dessens (Post-Merger Integration Consultant), we examined what those legal considerations mean after closing—during the phase when real value needs to be created: integration.
Our main observation?
👉 Earn-outs are legally structured, but their outcome is determined during the integration process. In practice, this often leads to:
In short: what seems like a solution at the signing stage often becomes a problem after closing. From a legal perspective, there are a number of clear considerations for the seller, but just as important is how these agreements play out in practice during the integration process and in day-to-day decision-making following the acquisition.
What salespeople need to watch out for — and what actually happens
✅ From a legal perspective:
If the seller is not involved after closing, there is no control. If the seller does not remain involved in the target company in a management role, he has no control over policy and operations after the acquisition—and therefore no control over the realization of the earn-out.
➡️ From an integration perspective:
After closing, control almost always shifts to the buyer. At the same time, that is precisely when the integration process begins: systems are merged, strategies are adjusted, and decision-making is centralized. The factors that determine the earn-out therefore change, without the seller having any further influence over them. This is one of the main causes of subsequent disputes and delays in the integration process.
✅ From a legal perspective:
If the buyer and seller do not agree on how the buyer is to contribute to the achievement of the earn-out, the only remaining obligation is often a best-efforts obligation based on reasonableness and fairness. In practice, this offers limited protection.
➡️ From an integration perspective:
After closing, the buyer typically focuses on broader objectives than just the earn-out, such as synergies, cost savings, or strategic repositioning. What is good for the group is not automatically good for the earn-out. Without specific agreements, this creates a natural tension.
✅ From a legal perspective:
The seller’s position in terms of proof is weak in the absence of specific obligations on the buyer’s part. It is difficult to prove that an obligation to use best efforts has not been fulfilled. There is no guaranteed result, and the seller often lacks sufficient information.
➡️ From an integration perspective:
During the integration process, many decisions are made centrally and justified with strategic arguments. As a result, it is not only legally challenging for the seller but also difficult to understand, in practical terms, why targets are not being met.
✅ From a legal perspective:
Open-ended standards and ambiguously worded obligations regarding the fulfillment of the earn-out may seem flexible, but in practice they often lead to uncertainty and disputes.
➡️ From an integration perspective:
Integration is, by definition, a custom process. Without concrete guidelines, there is room for interpretation—and thus differences of opinion about what constitutes “reasonable” behavior. Especially at a stage when interests are already diverging, this increases the likelihood of conflict.
✅ From a legal perspective:
Think in advance about what is needed to achieve the earn-out. It is important to clearly define what is required to achieve the earn-out.
➡️ From an integration perspective:
This is where the earn-out and integration really come together. If the earn-out depends on factors such as revenue growth, you need to consider questions like the following in advance:
Without this link, the earn-out is effectively superseded by integration decisions.
✅ From a legal perspective
The interests of the target company take precedence. According to case law, the board of the target company has discretion and must act in the company’s best interests. This may conflict with the earn-out.
➡️ From an integration perspective:
In practice, this means that management focuses on what is best for the company or the group at that moment, rather than on maximizing the earn-out. The earn-out thus becomes a secondary consideration.
Joint conclusion
The main pitfall of an earn-out is that it is often designed primarily from a legal perspective, without taking it into account within the broader integration strategy. This is despite the fact that the outcome of the earn-out is actually determined during the integration phase. Often, the structure of the earn-out and the integration strategy are not aligned. A legally well-drafted earn-out that ignores operational realities works suboptimally for the buyer, and a strong integration strategy without clear agreements on the (method of) realization of the earn-out leads to suboptimal outcomes for the seller, resulting in ambiguity, uncertainty, and conflicts.
The key, therefore, lies in designing the earn-out and the integration strategy simultaneously. This requires close collaboration between the legal team and the business prior to closing.
Elmira Baghery and Branka Dessens
Elmira Baghery is the founder of Legal Notes and a lawyer. She specializes in handling and resolving business disputes, including those arising from mergers and acquisitions.
Branka Dessens is a Post-Merger Integration consultant and interim leader who translates strategy into action and provides hands-on leadership for integrations to deliver value, with a sharp focus on both operations and culture.
