Earn-out structures in Swedish M&A — five pitfalls

Earn-out mechanisms are one of the most frequently used — and most frequently mishandled — tools in Swedish corporate acquisitions. On paper, they resolve disagreement on a company's future value by making the price contingent on actual performance. In practice, they shift the negotiation to the period after completion, when interests often diverge more than ever.

EBITDA is not EBITDA. The distinction between adjusted and reported EBITDA, the treatment of one-off items, intra-group allocations and currency effects — every concept has to be defined in the agreement. Otherwise the dispute will fall to the auditor.

The buyer typically wants to integrate the target into its group. The seller wants the target run as if the transaction had not happened. The agreement must expressly regulate which actions the buyer may or may not take during the earn-out period.

The longer the period, the greater the risk that performance will be driven by factors no one could foresee at signing. A three-year earn-out that crosses an economic cycle almost always creates a dispute.

The seller has left the company but still needs to monitor performance. The agreement must give the seller a right to information — reports, meetings, review — while protecting the buyer's legitimate trade secrets.

Most earn-out disputes concern calculations, not points of law. Swift mechanisms — such as an independent expert or auditor — settle the dispute in days rather than years.

The earn-out is a powerful tool when used correctly. In our experience it almost always improves when sellers and buyers accept early on that no earn-out is perfect — and instead invest time in keeping the mechanism as simple as possible.

Martiq regularly acts for sellers and buyers in complex transactions where the earn-out makes up a significant part of the purchase price.