Earn-Outs in France – Legal Fiction or Real Lever?
How to Avoid the Most Common Pitfalls of Earn-Outs in French M&A
Earn-out mechanisms are popular in international M&A — especially when buyers and sellers disagree on valuation, or when seller-managers stay on board post-deal. But in France, earn-outs are often misunderstood, poorly implemented, or outright inapplicable in practice.
This issue explores how to use earn-outs effectively under French law — and what to avoid.
Focus – Structuring Earn-Outs in French Private M&A Deals
1. Earn-Outs Are Valid — But Must Be Certain
French law recognizes earn-outs ("compléments de prix"). However, they must comply with strict rules:
Objective, measurable criteria must determine the amount
The mechanism cannot rely solely on the discretion of one party
The calculation method must be defined at signing — vague or discretionary formulas are unenforceable
💡 Tip: Avoid wording like “based on EBITDA as determined by the Buyer”. If challenged, French courts may deem the clause potestative — and invalidate it entirely.
🔍 Legal Culture Contrast – France vs. U.S./U.K.
In U.S. or U.K. practice, earn-out clauses often include broad buyer discretion over post-closing operations, with “reasonable efforts” or “good faith” expectations. Courts may interpret ambiguities based on commercial reasonableness.
➡️ In France, this flexibility doesn’t apply:
No implied duty of good faith without express wording
Potestative conditions — where one party controls the outcome — are void
Courts won’t “complete” vague formulas — they may simply strike the clause down
Key Point: What might fly in Delaware can be thrown out in Paris. Earn-out clauses must be legally certain and contractually balanced.
2. Tax Treatment Is Often Overlooked — and Can Backfire
Earn-outs are often attractive for sellers from a tax deferral perspective:
For individual sellers, taxation applies only upon actual receipt of the earn-out
But if the earn-out is reclassified as remuneration (e.g., for managers who remain in place), it becomes subject to income tax and payroll charges
For acquiring companies, earn-out payments may be non-deductible, especially if linked to goodwill or requalified as disguised salary.
💡 Tip: If the earn-out depends on the seller-manager’s future performance or retention, you’re in grey territory — and may trigger tax and URSSAF risks.
3. French Courts See a Lot of Earn-Out Disputes
Typical litigation scenarios include:
Disagreements over EBITDA/EBIT definitions
Post-closing restructuring or reallocation of costs by the buyer
Lack of access to accounting information for the seller
Sudden business perimeter changes after closing
To mitigate risks :
Lock down accounting principles and reference financials
Include clear audit or access rights
Consider inserting a mutual “best efforts” clause to meet performance conditions
4. Earn-Out vs. Retention Bonus — Know the Line
It’s tempting to use an earn-out to incentivize seller-managers who stay on board post-closing. But in France, the distinction between capital gain and salary is strictly enforced.
If:
The earn-out is paid to an individual (not a holding company)
It depends on active involvement or results under their control
It is disproportionate to the equity sold
Then tax authorities may reclassify it as employment income — triggering up to 70% effective taxation (including social charges).
💡 Tip: When in doubt, split the mechanism: a clear capital gain earn-out + a separate management incentive package.
Case Study – Earn-Out Tied to EBITDA Missed the Mark In a 2022 deal, a UK buyer acquired a French tech SME with a €1.5M earn-out based on 2023 EBITDA. The SPA vaguely defined the KPI and allowed the buyer to freely restructure the company.
Post-closing, EBITDA dropped after a strategic pivot. The seller claimed manipulation. The buyer invoked the contractual terms.
Outcome: the French court ruled the earn-out clause too vague to be enforceable — no payout.
The Axipiter View
n the U.S. or U.K., courts often tolerate broad buyer discretion in earn-out clauses — as long as there’s no bad faith. In France, that doesn’t fly. Discretion is not just limited — it may invalidate the clause entirely. To work, a French earn-out must be contractually precise, legally certain, and carefully structured from a tax and labor standpoint. What seems commercially reasonable abroad may be unenforceable here.
— Eric Kopelman, Partner