Earn-out in a French business sale: structure, indicators and pitfalls

Up to date as of 14 May 2026.

An earn-out is a variable price mechanism: part of the sale price for a business is not fixed at signing but depends on the future performance of the company sold. It bridges the gap between a seller confident in the value of the business and a buyer who wants that value to be demonstrated after closing. But a poorly drafted clause creates three distinct risks: unanticipated tax for the seller, post-closing accounting manipulation that is hard to prove, and a calculation dispute that may run for years. Cabinet Hayot Expertise, Paris, regularly handles business sale files in which earn-out provisions are a blocking point or a source of litigation.

In brief. The earn-out price supplement is treated as part of the capital gain on sale and taxed under CGI art. 150-0 A (flat tax PFU of 30% or progressive income tax scale on election). The reference indicator must be precisely defined in the sale agreement, protected by anti-abuse clauses, and auditable by a third party. The typical duration is 1 to 3 years. The warranty and indemnity (garantie d'actif et de passif, GAP) must cover the full earn-out period.

An earn-out is a variable price clause: a portion of the sale proceeds is not finally determined at closing but depends on the achievement of future targets, generally financial ones. Under French law, it rests on the principle of freedom of contract enshrined in Article 1102 of the Civil Code and on the price-determination rules set out in Articles 1163 and 1164, which permit a price that is determinable at the date of contract provided the objective elements for its later calculation are defined.

The Cour de cassation (commercial division, 9 March 2010, No. 09-11.085) confirmed that earn-out indicators must be objective and calculable by a third party, independently of the will of either party. A formula leaving the acquirer discretionary power over the calculation exposes the clause to a nullity challenge or contentious rescission.

Principle: CGI art. 150-0 A#

A price supplement linked to an indexation clause in direct relation to the company's activity is characterised for tax purposes as a supplement to the capital gain on disposal of securities. It is taxed under CGI art. 150-0 A in the year of actual receipt by the seller.

The applicable rate is the flat tax (PFU) of 30% (12.8% income tax + 17.2% social contributions). The seller may elect to be taxed at the progressive income tax scale if more favourable, but this election is global and applies to all capital income for the year. The social contribution rates are those of 2025 — to be confirmed for 2026 when the Finance Act is published.

Interaction with deferral (art. 150-0 B) and roll-over relief (art. 150-0 B ter)#

When shares have been contributed to a holding company before the sale, the earn-out receivable is collected by the holding company rather than the seller personally. Whether the deferral (art. 150-0 B, where the contributor does not control the holding) or roll-over relief (art. 150-0 B ter, where they do control it) applies to the collection of that earn-out is technically sensitive: depending on how the receivable is characterised, its collection may or may not trigger the end of the deferral period. This point must be secured contractually and fiscally before the sale agreement is signed, in coordination with legal counsel and the tax adviser.

Typical duration#

Market practice places earn-out duration between 1 and 3 years. A 2-year period is the most common in SME transactions and mid-market MBO/LBO deals. Beyond 3 years, risks increase: economic environment shifts become hard to neutralise, staff turnover affects performance, and the acquirer's strategy may change. A 5-year earn-out is only justified in long-cycle sectors (infrastructure, cumulative ARR SaaS, pharmaceutical R&D) and must be accompanied by stronger seller protections.

Why EBITDA is the preferred indicator#

EBITDA must be contractually defined: which charges are included, which restatements are permitted (non-recurring items, group costs, intercompany rents), which accounting framework applies, and on what timetable the reference accounts are drawn up.

Floor, cap and gradation#

A well-structured earn-out typically includes:

• A floor: a minimum amount guaranteed if the indicator reaches a first threshold, ensuring the seller does not receive zero on a minor shortfall.
• A cap: a maximum amount, protecting the acquirer against outperformance that would not justify an unlimited payment.
• A linear or stepped gradation between floor and cap, precisely defining the relationship between the indicator value and the supplementary payment.

In practice. A business sold for €10M with an earn-out capped at €4M could be structured as follows: €0 if cumulative 3-year EBITDA < €6M; €1M supplement per €500k of cumulative EBITDA above €6M; cap of €4M if cumulative EBITDA ≥ €8M. This graduated structure must be accompanied by a calculation schedule annexed to the sale agreement.

This is one of the most frequently underestimated issues in the business sale files handled by Cabinet Hayot Expertise. Once the sale is completed, the acquirer manages the business freely. Without protective clauses, the acquirer can legitimately — in the context of integration — take decisions that reduce the reference EBITDA: recharging group overhead, increasing head-office costs, accelerating depreciation, or taking on external financing that raises financial charges.

Clauses to negotiate systematically:

1. Consistent accounting methods: the earn-out reference accounts are drawn up on the same bases as the last audited accounts before closing.
2. Prohibition of atypical exceptional charges: any non-recurring charge, abnormal capital expenditure or unjustified commercial expenditure must be added back for the earn-out calculation.
3. Limitation of intragroup recharges: management fees and intragroup service charges are capped or neutralised for the calculation.
4. Information access: the seller must have access to the accounting books, general ledger and supporting documents throughout the earn-out period.
5. Third-party expert: in the event of a dispute on the calculation, an independent accountant appointed by the President of the Commercial Court rules within a fixed period, with a binding decision.

The earn-out and the garantie d'actif et de passif (GAP) are two value-protection mechanisms in a business sale, but they serve complementary roles and must be consistent in their duration.

The GAP protects the acquirer against undisclosed liabilities or asset impairments pre-dating the sale. The earn-out protects the seller against an undervaluation of future performance. If the GAP expires before the end of the earn-out period, the acquirer may claim against the seller for a pre-sale liability while the seller is still awaiting their earn-out payment — creating a conflict of set-offs.

Practical rule. The GAP period must cover the full earn-out period plus a contestation window. The franchise and cap thresholds of the GAP should also be calibrated taking into account the potential earn-out amount.

In LBO and MBO transactions, acquirers often wish to align key managers with post-closing performance. Part of the earn-out may be passed through to key managers via a separate management package. This structuring has its own tax constraints (risk of recharacterisation as employment income subject to income tax and social contributions if the link to performance is not sufficiently objective) and must be documented separately from the main earn-out.

Where the seller remains an employed executive after the sale, the risk is particularly sensitive: a price supplement whose receipt depends more on the seller's continued presence than on the objective performance of the company may be recharacterised as remuneration. The Cour de cassation has been consistent on this point.

Context. A Paris-based SME specialising in HR consulting is sold to an industrial group. The parties agree on a base value of €10M (7× EBITDA of €1.43M), but the acquirer considers the client base fragile. An earn-out is negotiated.

Agreed structure.

• Fixed price at closing: €10M
• Earn-out over 3 years (N+1, N+2, N+3) based on cumulative adjusted EBITDA
• Floor: €2M if cumulative EBITDA ≥ €3.5M
• Cap: €4M if cumulative EBITDA ≥ €4.5M
• Linear gradation between €3.5M and €4.5M of cumulative EBITDA

Tax for the seller (natural person, shares held > 2 years).

• Each earn-out tranche is taxed in the year of receipt.
• PFU flat tax of 30% on each payment received.
• If all three tranches are received, assuming a total supplement of €3M, the tax charge is approximately €900k at the PFU rate, bringing the total tax burden on the transaction to around €3.9M (2025 rates — to be confirmed for 2026).

Key points flagged by Cabinet Hayot Expertise.

• Adjusted EBITDA must be defined in an accounting schedule of at least 5 pages with worked numerical examples.
• The GAP must run until 31 December N+4 (one year after the earn-out period ends).
• A €2M escrow was put in place to guarantee earn-out payment in the event the acquiring group was itself sold.

In the business sale files handled by Cabinet Hayot Expertise in Paris, recurring difficulties on earn-outs fall into five categories:

1. Seller departure during the earn-out period. If the seller is an employed executive and leaves the company before the end of the earn-out (voluntarily or otherwise), the clause must specify whether the supplement remains due pro rata, in full, or is forfeited. Absence of a provision on this point is one of the most frequent causes of litigation.

2. Dispute on the EBITDA calculation. Both sides appoint their own experts. Without a contractually designated third-party expert, the dispute is prolonged and costly. A 30-day window for formal contestation followed by appointment by the President of the Commercial Court is the standard clause to include.

3. No access to accounts. The seller cannot control what they cannot see. The information access clause must specify which documents, within what timeline after year-end, at what level of detail, and the right to appoint an independent accountant to audit the calculation.

4. Post-closing accounting method change. A change in accounting framework may alter adjusted EBITDA without intentional manipulation. The clause must neutralise the effect of method changes for the earn-out calculation.

5. Resale of the target during the earn-out period. If the acquirer resells the company before the earn-out ends, the supplement must either be immediately paid to the seller or guaranteed by the new acquirer. Absence of an acceleration clause or payment guarantee exposes the seller to receiving nothing if the new acquirer is insolvent or contests the clause.

A well-drafted earn-out is one that two independent experts can calculate and reach the same result. Any formula that leaves more than 10% interpretation latitude on the outcome is too vague to include in a sale agreement.

The business sale files handled by Cabinet Hayot Expertise in Paris show that disputes almost never concern the earn-out principle itself, but three technical points: the definition of permitted restatements, the treatment of intragroup charges after closing, and the seller's information rights. Each of these three points warrants a separate schedule to the sale agreement.

On the tax side, forward planning is critical: the seller must model the tax on each earn-out tranche in the year of receipt, integrate this tax liability into personal cash flow projections, and verify with their adviser whether a prior contribution to a holding company alters the tax chain. A poorly planned structure can expose the seller to partial double taxation or a challenge to the roll-over deferral.

The underestimated risk. An earn-out that in practice remunerates the seller's continued presence rather than the objective performance of the company. Once the supplement is perceived as linked to the seller-executive's retention, the tax and social security characterisation becomes sensitive: risk of recharacterisation as employment income subject to contributions, loss of flat-tax benefit on the relevant fraction. The boundary between price supplement and deferred remuneration must be explicit in the clause.

Sources: Légifrance — Civil Code art. 1102, 1163, 1164; CGI art. 150-0 A, 150-0 B, 150-0 B ter, 150-0 D; BOFiP BOI-RPPM-PVBMI-20-10-10-20; Cass. com. 9 March 2010 No. 09-11.085.