By Bayani Lauraya, Managing Partner, Kreston Thailand
Most buyers I speak to understand that earn-outs are complicated. What they underestimate is how much of that complexity is created by decisions made before the SPA is signed decisions that look minor at the time and become significant disputes two or three years later. By the time the seller submits their earn-out claim, the buyer’s options are limited. The SPA says what it says. The only leverage left is whether the numbers support an adjustment. That is a difficult position to be in, and it is entirely avoidable.
Define EBITDA Like a Lawyer, Not Like an Accountant
The adjusted EBITDA definition in an earn-out SPA is not a technical accounting concept. It is a negotiated number. What gets included, what gets excluded, and how adjustments are calculated will determine what the seller can claim and what the buyer can challenge. Most SPA definitions are not specific enough.
In a recent engagement, we reviewed an earn-out claim where the seller had included a one-off regulatory credit a release of prior-period accruals with no connection to ongoing trading performance as part of operating EBITDA. The SPA definition did not explicitly exclude it. The seller’s position was that nothing in the agreement required them to remove it. They were not wrong. The definition simply had not anticipated it.
Before signing, buyers should insist on an exhaustive list of what is excluded from adjusted EBITDA: non-recurring items, one-off credits, changes in accounting policy, cost deferrals, and any government reliefs or grants. The definition should also specify how cost timing differences are treated particularly in businesses that perform annual rather than monthly stock counts, where a full year of inventory movement gets concentrated into a single month and can materially distort the EBITDA of any period that month falls in.
The rule is simple: if you cannot agree on whether something is included or excluded before signing, you will not agree on it when the sellers earn-out payment depends on the answer.
A Strong EBITDA Number Is Different from a Sustainable One
Earn-out structures that use peak trailing twelve-month EBITDA across a multi-year test period create a specific problem: they reward the seller for finding their best window, not for delivering consistent performance. A business can generate strong EBITDA in the early years of an earn-out period and then deteriorate significantly and the seller can still trigger a full earn-out payment based on the earlier peak.
When reviewing earn-out claims, I always look at the trend across the full period, not just the claimed window. What does the most recent quarter look like compared to the peak quarter? Is the EBITDA margin expanding or contracting? Are the drivers of early performance pricing, margins, cost structure still intact, or have they already shifted? A business where EBITDA was strong eighteen months ago but has been declining for the past six months tells a vastly different story about future performance than the headline earn-out number suggests.
The factors to watch are operational and external. On the operational side: payroll growth relative to revenue, gross margin trends by product line or customer segment, rent and occupancy cost escalation, and administrative cost creep. On the external side: competitive pressure in the market, customer concentration risk, supplier cost movements, and any regulatory or macroeconomic changes affecting the sector. These are the inputs that determine whether the EBITDA being claimed is a floor or a ceiling for future performance. Buyers who understand these trends before signing are in a far stronger position to structure earn-out thresholds that reflect realistic expectations and identify early in the earn-out period when the business is heading in the wrong direction.
EBITDA and Cash Are Not the Same Thing
This is the point that surprises buyers most often, and it matters more in earn-out structures than in almost any other context. EBITDA measures operating earnings before a specific set of deductions. It does not measure cash generation. The gap between the two is where earn-out structures are most frequently misunderstood and where buyers most frequently overpay.
Consider what sits below EBITDA but still costs the buyer money during the earn-out period. Working capital movements inventory builds, debtor growth, creditor reductions consume cash without appearing in EBITDA. Capital expenditure is excluded from EBITDA by definition. Shareholder loan repayments made by the business to the seller during the earn-out period reduce cash but do not affect EBITDA. Tax payments, financing costs, and intercompany settlements all follow the same logic. A business can report strong EBITDA throughout an earn-out period while its cash position deteriorates materially and the buyer, focused on the earn-out metric, may not notice until the payment has already been made.
The SPA should require the business to report cash flow alongside EBITDA throughout the earn-out period. Any material divergence between the two should trigger a mandatory explanation from management. Buyers should also consider whether shareholder loan repayments, related-party transactions, and capex above an agreed threshold require buyer approval during the earn-out period. These are not unusual requests. They are the controls that prevent a seller from optimizing the earn-out metric at the expense of the business the buyer owns.
Reporting Rights Are Not Enough You Need Approval Rights
Most earn-out SPAs give the buyer the right to receive monthly management accounts. That is necessary but not sufficient. Receiving information and having the ability to act on it are different things. A buyer who gets monthly accounts but has no right to approve the annual budget, no right to challenge material cost increases, and no right to restrict related-party transactions during the earn-out period is an informed spectator. The seller is still running the business on their own terms.
Before signing, buyers should negotiate the following into the SPA: joint approval of the annual budget for each earn-out year, a requirement that any cost line exceeding an agreed threshold requires buyer consent, restrictions on related-party transactions and shareholder distributions during the earn-out period, and a regular operational review quarterly at minimum where management presents performance against budget with variance explanation. These provisions protect the integrity of the earn-out metric and give the buyer the visibility to identify problems while there is still time to address them.
The earn-out period is not a handover phase where the buyer waits for the seller to finish. It is a period of shared ownership with competing financial interests. Buyers who treat it as the former are consistently surprised by what they find when it ends.
Earn-Out SPA Checklist
For buyers — use before signing any SPA with an earn-out component
Get the Structure Right Before You Sign
If you are evaluating an acquisition in Asia that includes an earn-out component, the decisions made in the SPA negotiation will determine whether the earn-out works in your favor or against it. We advise buyers on earn-out structure, EBITDA definition, monitoring rights, and post-acquisition financial oversight before the SPA is signed and throughout the earn-out period.
Contact Bayani Lauraya directly at bayani.l@kreston-thailand.com to discuss your transaction before you commit to a structure.