Meaning and transaction use
An SEC-filed asset purchase agreement provides annual earn-out payments as stated percentages of post-completion revenue and identifies the measurement periods and payment treatment. [S1]
A separate SEC-filed earn-out agreement addresses product identification, bundled-revenue allocation, quarterly calculation statements and annual payment timing. [S2]
Proposed control method: define every input and permitted adjustment, model scenarios, assign operating covenants and reporting responsibilities, and retain an auditable bridge from source systems to each earn-out statement.
Worked example
Illustrative revenue earn-out only. Assume eligible revenue of 20.0 million, a 15.0 million threshold, a 10% rate on excess revenue and a 1.0 million cap. Ignore taxes, currency and prior-period carry-forward.
Scroll the table horizontally to view all columns.
| Measure | Calculation | Result |
|---|---|---|
| Eligible revenue | Given | 20.0m |
| Revenue above threshold | 20.0 - 15.0 | 5.0m |
| Uncapped payment | 5.0 x 10% | 0.5m |
| Contractual cap | Given | 1.0m |
| Illustrative earn-out payment | Minimum of 0.5 and 1.0 | 0.5m |
The illustrative payment is 0.5 million because the calculated amount is below the cap. The executed agreement determines eligible revenue and all adjustments.
Proposed transaction review process
Select the objective
Define which valuation gap or performance uncertainty the contingent payment addresses.
Draft measurable terms
Specify metric, perimeter, threshold, rate, period, cap, accounting rules and excluded items.
Allocate post-closing control
Set business-conduct obligations, information rights, reporting, audit access and decision boundaries.
Calculate and resolve
Prepare statements from controlled data, manage objections and settle under the agreed timetable.
Evidence checklist
Commercial evidence
Valuation cases, forecasts, sensitivities and rationale for the selected metric.
Definition evidence
Metric schedule, accounting policies, examples, exclusions and allocation rules.
Operating evidence
Budgets, product and customer mapping, conduct obligations and decision approvals.
Settlement evidence
Source data, calculation statements, objections, determination and payment record.
Decision framework
| Situation | Proposed action |
|---|---|
| The metric can be shifted by buyer decisions | Define conduct obligations, allocation rules and information rights before signing. |
| Several metrics produce conflicting outcomes | Specify priority, interaction, caps and worked examples for each scenario. |
| The business will be integrated | Define the reporting perimeter and allocation of shared revenue, cost and resources. |
| A calculation is disputed | Use the contractual notice, access and expert procedure within the stated deadlines. |
Common errors to check
- Using an undefined metric or changing accounting policies during the period.
- Ignoring how integration or product bundling changes measurement.
- Setting a cap without testing realistic performance scenarios.
- Leaving information rights and dispute deadlines unclear.
Model the earn-out
Bring the valuation cases, operating forecast and proposed contingent terms to an earn-out review. Test the metric, control rights, reporting path and dispute mechanics across realistic scenarios.
Discuss the transactionPrimary references and editorial scope
- SEC filing: Revenue-based earn-out periods and rates
Example contingent purchase-price payments based on stated revenue percentages over defined periods. Reference checked 17 September 2026. - SEC filing: Earn-out calculation and reporting agreement
Example eligible-product identification, bundled-revenue allocation, statements and payment timing. Reference checked 17 September 2026.
General transaction education using public United States filings. Figures and mechanics are hypothetical. Earn-out drafting, accounting, tax, employment, securities and dispute treatment depend on the executed documents and jurisdictions.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
