The key phrase «earn-outs and locked box in M&A» is no longer exclusive to law firms or reports gathering dust in drawers. Today, if you are in the middle of a transaction – or close to it – you are likely to have heard these terms. What was once a rarity is now almost the norm. But do we really know how they work, or do we just go with the flow for fear of being left out? Here’s an explanation that doesn’t require a PhD or infinite patience.
What is behind earn-outs and locked box in M&A?
CMS’s latest European study on M&A transactions provides the keys: more money is moving, there is investor appetite, and formulas are being sought to better spread the risks. The result? Two structures are leading the conversation: earn-outs and the locked box system.
Let’s start with the earn-out. It is simple, but powerful. Its usefulness lies in the fact that it helps to bridge one of the most tense discussions in any transaction: how much what is being sold is really worth. Often the seller believes that his company is worth more than what the buyer is willing to pay. And the buyer, quite rightly, does not want to make promises without proof. The earn-out puts a solution in the middle: «I’ll pay you a part now and, if the company performs as you say it will, I’ll pay you the rest later».
From the buyer’s point of view, moreover, the earn-out acts as a safety net. This is especially useful when there is information asymmetry. For example, if the business is in another country, has never published its figures, or has many intangible assets that are difficult to value. If the future of the company is uncertain, this model allows the price to be adjusted to concrete results, not promises.
Another detail that often goes unnoticed? In many operations, the earn-out achieves something key: retaining the team. If there are key managers or founders in the equation, this model gives them real incentives to stay involved and ensure that the company meets the agreed objectives. There is no better way to align interests than to make the seller have to prove that their valuation was not smoke and mirrors.
It is no coincidence that this model is growing so much in sectors such as technology, healthcare and media. According to CMS, by 2024 it was already present in 25% of operations. Its highest level in the last decade.
Then there is the locked box, which also has its own thing. It looks like a safe, but it is actually a structure that fixes the price of the transaction from a specific date. «This was worth the business on 31 January, and that’s the price. No adjustments, no surprises. Sure, it requires trust, solid data and very clear prior agreements. But once closed, the discussion is over. And that is priceless in a negotiation.
This system has gained momentum especially in Infrastructure, Energy and Real Estate. According to CMS, it is already used in 60% of transactions without price adjustments. Why? Because it avoids surprises.
The balance of power
For years, many M&A deals were a tug-of-war where the seller had the upper hand. Today, the buyer comes in stronger. We see this in details such as liability periods, which are getting longer and longer, and the rise of W&I insurance. In other words, if something goes wrong, it is covered by insurance. In 2024, they were present in one out of every four operations. In the large ones, in almost three out of four.
The curious thing is that even when there is arbitration (which is becoming increasingly common), 70% of cases are still governed by national rules. Why is that? Perhaps because relying on what you know still outweighs taking the plunge into the unknown, no matter how international it may sound.
It is not all clauses and technicalities. Artificial intelligence is starting to creep in, but slowly. Thirty-two per cent of the tools used in M&A already incorporate it, but it is not yet in charge. And ESG criteria – the ones that everyone mentions on LinkedIn – are rarely mentioned: only 6% of contracts include them. Just enough to say that they are there, but far from being a priority.
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