Earn-Out
Acquisition consideration paid contingently after closing based on achievement of agreed milestones (regulatory, revenue, or technical).
Definition
An earn-out is a portion of acquisition consideration paid after closing only if the acquired business achieves agreed milestones, typically FDA approval, CE marking, revenue thresholds, integration milestones, or specific technical achievements. In MedTech, where regulatory and commercial risk is concentrated in identifiable inflection points, earn-outs are extremely common and may represent 30-60% of total deal value. Earn-outs can take the form of cash payments, contingent value rights (CVRs) traded as securities, or escrowed equity.What this means in practice
Earn-out disputes are one of the most litigated areas of M&A. Common flashpoints: who controls the post-close business decisions that drive milestones, whether buyer must use commercially reasonable efforts, and how revenue is measured.- •Drafting earn-out triggers loosely so the buyer can de-prioritize the program post-close.
- •Failing to negotiate operating covenants that protect the path to earn-out.
Related terms
Grouped by themeEditor's picks
· Hand-selected related conceptsValuation ratio applied at exit, e.g., enterprise value to revenue.
Transactions in which one company acquires or combines with another, the dominant MedTech exit path, typically a strategic acquisition by an established player.
Contingent payment triggered by a defined event in a partnership, M&A, or financing.
Investment paid in installments triggered by predefined milestones.
More in Investment & Finance
· Same categoryAn independent fair-market-value appraisal of common stock used to set tax-compliant strike prices for employee stock options.
Adjustment that protects investors if the company raises a future round at a lower price.
Interim financing between priced rounds, usually convertible.
Rate at which a company spends cash, typically expressed monthly.
Primary references
3 sources- 1
ABA M&A Committee, EarnoutsVerifiedABAamericanbar.org
- 2
NVCA Model Merger AgreementVerifiedNVCAnvca.org
- 3
Silicon Valley Bank - Healthcare ReportsVerifiedSVBsvb.com
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