Earn-out in France 2026: Structuring a Secure Deferred Consideration Clause

Earn-out in France 2026: Structuring a Secure Deferred Consideration Clause

The earn-out (or deferred consideration clause) has become an essential tool in M&A transactions. It allows part of the price to be deferred and conditioned on the target's future performance. In 2026, in an environment of elevated risk premium and contested valuations, the earn-out plays a buffer role between sellers' expectations and buyers' caution. But it is also one of the most frequent sources of post-acquisition disputes.

Definition and Function

The earn-out is a clause by which a fraction of the sale price is:

• Deferred in time (typically 1 to 3 years)
• Conditioned on achievement of measurable objectives
• Calculated according to a predefined formula

Its economic function is threefold:

1. Reduce information asymmetry between seller and buyer
2. Align interests when the seller remains involved in management
3. Protect the buyer by transferring part of the operational risk to the seller

French Legal Framework

The earn-out clause rests on article 1591 of the Civil Code: the sale price must be determined or determinable. The Cour de cassation has long admitted the validity of prices calculated by formula, provided the formula does not depend on the will of one of the parties (Cass. com., 7 April 1987, no. 85-11.110).

Article 1592 of the Civil Code allows the price determination to be entrusted to a third party, whose decision binds the parties save for gross error (Cass. com., 8 February 2017, no. 15-26.193).

Earn-out Indicators

Financial Indicators

Most common:

• EBITDA: M&A reference indicator
• EBIT
• Revenue: simpler to measure but easier to manipulate
• Free Cash Flow
• Net income: sensitive to tax management choices

Operational Indicators

• Sales volume
• Number of active customers
• Renewal of key contracts
• R&D milestones (typical for biotech)
• Regulatory approvals (healthcare, finance)

Hybrid Indicators

Combinations are possible: for example, EBITDA conditional on a minimum revenue threshold.

Earn-out Structuring

Reference Period

Typically 1 to 3 years post-closing. Beyond that, the link with prior management fades and litigation risk increases.

Calculation Method

Several structures coexist:

• Linear: EUR 1 of additional EBITDA = EUR X of earn-out
• Tranched: objective tiers with fixed amount per tranche
• All-or-nothing: single threshold, payable only if reached
• Mixed: minimum threshold + proportional share above

Cap and Floor

• Cap: maximum earn-out amount, generally 20% to 50% of initial price
• Floor: rare, but possible to guarantee a minimum (then closer to a vendor loan)

Accounting Method

Crucial: the clause must precisely define:

• The applicable accounting principles (IFRS, French GAAP)
• The adjustments (non-recurring items, intra-group charges, central cost allocations)
• The allocation rules for post-closing costs attributable to the buyer
• The expert's role in case of disagreement

Governance During Earn-out Period

This is the most sensitive point. The target now belongs to the buyer, who can influence indicators. To protect the seller:

Behavioural Covenants

• Conduct in ordinary course of business
• Maintenance of budgets: marketing, R&D, sales
• Prohibition of significant asset or business sales
• Consultation of seller on certain strategic decisions

Shareholders' Agreement or Management Contract

If the seller remains as director or minority shareholder, a shareholders' agreement organises their participation in governance.

Periodic Information

The seller must receive regular information (monthly or quarterly reports, IT system access).

Earn-out Disputes: Pitfalls and Solutions

The earn-out is one of the main sources of post-M&A litigation. Typical disputes concern:

Account Manipulation

The buyer is bound to perform the contract in good faith (article 1104 of the Civil Code). The Cour de cassation sanctions behaviours aimed at artificially reducing the earn-out (Cass. com., 27 March 2007, no. 06-13.452).

Unfavourable Reorganisations

The merger of the target with another subsidiary, business transfer, or excessive cost allocations may be challenged.

Disagreement on Reference Accounts

Recourse to an independent expert (article 1592 of the Civil Code or contractually mandated expert) is generally provided to settle disputes.

Best Efforts versus Reasonable Efforts

Best efforts obligations are preferable to results obligations. A "best efforts" obligation can be interpreted broadly (Cass. com., 19 May 2015, no. 14-13.192).

Accounting and Tax Treatment

For the Seller

The earn-out received after sale generally constitutes a price supplement subject to the capital gains regime (article 150-0 A French Tax Code). Subject to conditions, it may benefit from holding period abatements. Taxation occurs in the year of receipt.

For the Buyer

The earn-out is added to acquisition price and feeds the goodwill amortisation base (consolidated) or share value (statutory).

Earn-out vs Other Mechanisms

Mechanism	Function	Seller benefit	Buyer benefit
Earn-out	Defer price by performance	Capture upside	Reduce risk
Vendor loan	Phase payment	Security (rate)	Cash
Locked box	Fix price on reference accounts	Certainty	Simplicity
Closing accounts	Adjust price on closing accounts	Precision	Protection
Specific indemnity	Cover identified risk	Clarity	Targeted

Reference Case Law

• Cass. com., 7 April 1987, no. 85-11.110: validity of determinable price
• Cass. com., 27 March 2007, no. 06-13.452: good-faith performance of earn-out clause
• Cass. com., 8 February 2017, no. 15-26.193: scope of article 1592 expertise
• Cass. com., 19 May 2015, no. 14-13.192: interpretation of best-efforts obligations

Conclusion

The earn-out is a powerful negotiation tool, but its drafting conditions its success. Clauses with gaps on governance or accounting method generate costly and time-consuming litigation. A well-designed earn-out rests on three pillars: a verifiable and manipulation-resistant indicator, precise behavioural covenants, and a dispute resolution mechanism (expertise, mediation, arbitration). In 2026, experience confirms that investing in earn-out clause drafting is a very high-yield investment.

Sources: French Civil Code (articles 1104, 1591, 1592), French Tax Code (article 150-0 A), Cour de cassation case law, M&A firm practice.