M&A earn-out clauses bridge valuation gaps by making part of the purchase price depend on the target’s future performance. They can preserve deal momentum when buyers and sellers disagree about forecasts, but ambiguous metrics and operating rules frequently create post-closing disputes.
This guide explains twelve drafting risks and practical protections for buyers, sellers, founders, and investment teams negotiating contingent consideration in an M&A transaction.
Why parties use M&A earn-out clauses
Under Vietnamese law, M&A earn-out clauses must be drafted consistently with the pricing and payment provisions permitted under the Law on Enterprises and the Law on Investment; poorly defined M&A earn-out clauses are a common source of post-closing disputes referred to Vietnamese courts or arbitration centres such as VIAC.
An M&A earn-out allows the seller to receive additional value if the business achieves agreed results after closing. Buyers reduce the risk of paying upfront for unproven growth; sellers preserve an opportunity to realize their forecast. The mechanism works best when performance can be measured objectively and the seller retains meaningful influence.
1. Choosing the performance metric
Revenue is easier to observe but can reward unprofitable growth. EBITDA captures profitability but is sensitive to allocation and accounting choices. Gross profit, customer retention, regulatory approvals, or product milestones may be suitable in particular industries. The metric should match the economic assumption creating the valuation gap.
2. Defining accounting policies
M&A earn-out clauses should specify accounting standards, historical practices, classification rules, provisions, capitalization, reserves, and treatment of extraordinary items. A hierarchy should determine which rule prevails if policies conflict.
3. Setting the measurement period
Periods commonly range from one to three years. A short period may encourage decisions that boost immediate results at the expense of long-term value. A long period increases uncertainty and restricts integration. State the opening date, closing date, partial periods, and consequences of delayed completion.
4. Establishing targets and payment curves
Define thresholds, maximums, linear or stepped payments, catch-up rights, and whether performance in one year can offset a shortfall in another. Include worked examples for base, upside, downside, and boundary cases.
5. Buyer control of the business
After closing, the buyer normally controls strategy, budgets, staffing, pricing, financing, and integration. Sellers may request covenants requiring operation in the ordinary course, adequate resources, and no intentional diversion of revenue. Buyers should preserve reasonable business discretion while preventing deliberate avoidance.
6. Cost and revenue allocation
Shared services, management charges, referrals, transfer pricing, procurement savings, and group financing can materially affect the result. The agreement should explain which costs and revenues are included, excluded, or allocated on a consistent basis.
7. Acquisitions, disposals, and restructuring
Earn-out clauses must address the buyer’s ability to combine the target with another business, transfer contracts, discontinue products, acquire competitors, or sell the target. Possible solutions include separate books, formula adjustments, acceleration, or deemed achievement in specified events.
8. Seller involvement and employment
If sellers continue as managers, distinguish consideration for the business from compensation for services. State the effect of resignation, dismissal, death, disability, misconduct, and breach of restrictive covenants. Applicable tax and employment law may affect characterization.
9. Information and inspection rights
Sellers need timely statements, calculations, and supporting records. Buyers should define confidentiality, access hours, advisers, retention, and limits protecting privileged or competitively sensitive information.
10. Calculation and objection procedure
Specify who prepares the statement, delivery deadline, objection period, required detail, access to working papers, and consequences of silence. Disputed items should be identified precisely; undisputed amounts may be paid while remaining issues are resolved.
11. Expert determination and dispute resolution
Accounting disputes may be referred to an independent expert, while legal interpretation and covenant breaches remain for courts or arbitration. Define appointment, scope, standard of review, procedure, costs, and whether the decision is final except for manifest error.
12. Security and payment protection
Sellers may seek escrow, guarantee, letter of credit, security, acceleration, or restrictions on distributions. Buyers should coordinate these protections with financing covenants and permitted deductions for indemnity claims, taxes, or prior overpayments.
Key drafting checklist
Parties negotiating M&A earn-out clauses in Vietnam should also confirm that the deferred consideration structure is properly reflected in the transfer price used for tax reporting purposes, since the tax authority will scrutinise M&A earn-out clauses that materially understate the initial purchase price.
- Use a metric tied to the valuation thesis.
- Attach detailed accounting principles.
- Model the payment formula with examples.
- Define operating covenants and buyer discretion.
- Address integration and allocation effects.
- Specify seller employment consequences.
- Provide information and inspection rights.
- Create a clear objection timetable.
- Separate accounting and legal disputes.
- Coordinate set-off, escrow, and security.
- Address tax withholding and currency.
- State treatment on resale or change of control.
Common earn-out disputes
Well-drafted M&A earn-out clauses reduce this risk by fixing an unambiguous calculation methodology and a binding expert-determination mechanism from the outset, rather than leaving M&A earn-out clauses to be interpreted after a dispute has already arisen.
Frequent disputes concern revenue recognition, group overhead, delayed product launches, customer allocation, management termination, insufficient investment, and buyer integration decisions. Most can be reduced by converting commercial expectations into objective rules before signing.
Common negotiation pitfalls in M&A earn-out clauses
Valuation practitioners such as Rosenbaum and Pearl describe the earn-out as a bridge between a buyer’s and seller’s differing views of forward performance, but the bridge collapses if the metric is ambiguous.
A frequent drafting error is defining the target on “EBITDA” without specifying add-backs, allocation of shared corporate costs, or the accounting standard used to prepare the calculation. Sellers who accept an undefined metric routinely find the buyer’s post-closing accounting policies erode the earn-out even where underlying performance was strong.
M&A earn-out clauses should fix the accounting policy and provide a worked numerical example in a schedule.
A second pitfall, well documented in the M&A due-diligence literature, is granting the buyer unrestricted control over the business during the earn-out period without covenants requiring good-faith operation consistent with past practice.
Sellers should negotiate minimum-effort or non-diversion covenants, and buyers should resist metrics that depend on decisions the seller can no longer influence once control passes. Disputes over set-off rights against unrelated indemnity claims are the third recurring source of earn-out litigation.
How Vietnamese buyers and sellers should approach M&A earn-out clauses in practice
In Vietnam mid-market transactions, earn-outs are increasingly used to bridge valuation gaps where the buyer discounts an entrepreneur-founder’s growth projections and the founder is unwilling to accept a lower fixed price.
Structuring M&A earn-out clauses around VND-denominated statutory financial statements, rather than management accounts alone, reduces later disputes, since the tax authority-filed figures are harder to contest. Parties should also address how currency movement between signing and each measurement date affects the payment calculation.
Because the founder-seller frequently remains as general director or a key manager during the earn-out period, the agreement should clarify decision rights over budget, hiring, and related-party transactions, consistent with the operational-control frameworks common in deal-structuring texts.
Vietnamese market practice typically favours a one to three year earn-out period tied to revenue or gross profit rather than EBITDA, since EBITDA definitions are more exposed to dispute under evolving Vietnamese accounting standards.
A worked example: metric definition drives outcome
In a representative structuring scenario, a buyer offered a base price plus an earn-out tied to two years of EBITDA at a defined multiple.
Because the definition excluded a clear allocation methodology for shared group overhead the buyer later imposed, the calculated earn-out fell to near zero despite revenue growing 40%. The dispute was resolved only through expert determination.
The lesson consistent across the standard M&A texts is that M&A earn-out clauses are only as reliable as the definitions and worked examples that sit behind them.
Frequently asked questions
Are earn-outs suitable for every transaction?
No. They are less suitable when the target will be fully integrated, results cannot be tracked separately, or the seller has no operational influence.
Can the buyer set off indemnity claims?
Only if the agreement permits it and defines when a claim is sufficiently established. Sellers often resist set-off for disputed claims.
Should an earn-out be treated as purchase price?
The answer depends on structure, continuing employment, accounting standards, and tax law. Specialist advice is required.
How should M&A earn-out clauses define the performance metric?
Specify the exact accounting standard, list add-backs and exclusions, fix the cost-allocation methodology, and include a worked numerical example in a schedule to remove ambiguity.
What earn-out period is typical in Vietnam M&A deals?
One to three years is common for mid-market transactions, often tied to revenue or gross profit rather than EBITDA to reduce disputes under evolving local accounting practice.
Explore IVLF transaction services or contact IVLF for deal-specific drafting support.
Related M&A guides
Earn-out mechanics interact closely with the M&A purchase agreement, representations and warranties, and indemnification provisions in the same deal.
IVLF’s M&A advisory Vietnam team structures and negotiates M&A earn-out clauses for founders and investors, drawing on standard deal-structuring practice adapted to Vietnamese accounting and regulatory realities. If your transaction involves an earn-out, our Vietnam M&A lawyer team can review the metric definitions before signing. Contact IVLF to arrange a review.
Image source: Pexels. This article is general information and not legal advice.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
