In many Turkish M&A deals, the biggest gap between buyer and seller is valuation. Sellers believe future growth justifies a higher price; buyers worry that projections are optimistic. The tool that often bridges this gap is an earn-out clause—a mechanism where part of the purchase price is paid later, only if the company hits agreed performance targets.
Earn-outs can work extremely well in Turkey, but they can also become dispute factories if drafted vaguely. Most earn-out litigation stems from three issues: unclear metrics, unclear control rights during the earn-out period, and unclear reporting/audit rights. This 1500-word SEO-focused guide explains how to structure earn-out clauses in Turkey so they are measurable, enforceable, and commercially fair.
1) What Is an Earn-Out in Turkey M&A?
An earn-out is a performance-based payment mechanism in a share or asset purchase deal. Instead of paying the full price at closing, the buyer agrees to pay additional amounts later if the target business meets certain objectives over a defined period.
Earn-outs are common in:
- founder-led businesses where performance depends on the seller staying involved,
- fast-growing startups with uncertain projections,
- businesses where revenue depends on key customers or ongoing contracts,
- situations where buyer wants downside protection but seller wants upside participation.
Key point: An earn-out is not a “bonus.” It is part of the purchase price, tied to measurable performance.
2) Why Earn-Outs Often Fail (And How to Prevent Disputes)
Earn-outs fail when they are drafted like “gentlemen’s agreements.” The classic problems are:
- vague KPI definitions (“growth,” “profitability,” “success”),
- inconsistent accounting methods,
- buyer controls operations and can manipulate performance,
- seller lacks reporting/audit access,
- unclear timeline and payment mechanics,
- disputes about extraordinary events (one-time costs, new investments).
A good earn-out clause is a measurement system + control rules + dispute procedure.
3) Choosing the Right Earn-Out Metric (The Most Important Design Choice)
Earn-outs typically use one or more of these metrics:
A) Revenue-Based Earn-Out
Pros: simpler to measure, less accounting manipulation than profit.
Cons: revenue can be inflated by unprofitable deals; recognition rules matter.
B) EBITDA / Profit-Based Earn-Out
Pros: closer to real value creation.
Cons: heavily affected by accounting choices, allocations, and management decisions.
C) Customer/Contract-Based Earn-Out
Examples:
- number of new customers,
- retention rate,
- signed contracts value.
Pros: can match business reality.
Cons: requires clean definitions and verification rules.
D) Milestone-Based Earn-Out
Examples:
- license obtained,
- product launched,
- market entry achieved.
Pros: best for regulated or product businesses.
Cons: must define “achievement” precisely.
Practical takeaway: In Turkey, disputes are usually lower when metrics are simple and objectively verifiable.
4) Define the Earn-Out Period and Measurement Dates
Your clause must define:
- start date (closing date or next fiscal period),
- end date (6, 12, 24, or 36 months—whatever is agreed),
- measurement frequency (quarterly vs annual),
- deadlines for preparing earn-out statements,
- payment deadline after verification.
Best practice: Don’t leave reporting timing open-ended. Use specific dates and “deemed acceptance” rules.
5) Accounting Rules: Prevent “EBITDA Wars”
If your earn-out is profit-based, define accounting rules clearly:
- which accounting standard applies,
- consistency with historical financial statements,
- treatment of extraordinary items,
- treatment of management fees and related-party charges,
- caps on discretionary expenses (where reasonable),
- revenue recognition rules (if critical).
Best practice: attach a sample calculation schedule in an annex. If both sides can calculate it from the same data, disputes collapse.
6) Control and Conduct During the Earn-Out Period (Buyer vs Seller Tension)
The biggest earn-out risk in Turkey is control imbalance. If the buyer owns the company after closing, the buyer can:
- change strategy,
- increase overhead,
- shift customers to other group companies,
- change pricing,
- delay invoicing or recognition.
To reduce disputes, include “conduct covenants,” such as:
- operate the business in good faith and not primarily to avoid earn-out,
- no material change in accounting methods without consent,
- restrictions on related-party transactions,
- restrictions on shifting revenue or costs to affiliates,
- budget approval rights (limited and practical),
- seller’s continued role/authority if seller remains in management.
Practical note: Buyers should avoid agreeing to covenants that freeze operations. Sellers should avoid earn-outs without any conduct protections.
7) Reporting, Information, and Audit Rights (Earn-Outs Need Transparency)
A workable earn-out system usually includes:
- monthly/quarterly management accounts,
- KPI dashboard reporting,
- access to supporting documents (invoices, contracts),
- audit rights (limited frequency, structured process),
- dispute procedure if seller challenges calculations.
Best practice: include a short “objection window.” If seller doesn’t object within X days, the statement is accepted.
8) Payment Mechanics: How and When Earn-Out Is Paid
Define:
- payment dates (e.g., within 10 business days after statement acceptance),
- installment vs lump sum earn-out payment,
- escrow or security (if buyer credit risk exists),
- set-off rights (careful—can create disputes),
- tax handling (gross-up or withholding logic if applicable).
If buyer solvency is a concern, sellers should consider security:
- share pledge,
- parent guarantee,
- escrow holdback.
9) Extraordinary Events and “What If” Scenarios
Earn-outs must address real-life events:
- acquisition of new business lines,
- major capital injections,
- force majeure events,
- loss of a key customer,
- change of control of the buyer group,
- changes in law affecting operations.
The solution is not to predict everything, but to define:
- adjustment rules,
- renegotiation triggers,
- dispute resolution mechanism.
10) Dispute Resolution: Keep It Technical, Not Emotional
Earn-out disputes are often accounting disputes. Consider:
- expert determination clause (independent accountant),
- time-limited expert decision,
- limited scope of court/arbitration (only for legal issues).
This prevents years of litigation over calculation mechanics.
FAQ
Are earn-outs common in Turkey?
Yes, especially where valuation uncertainty exists. But they are often drafted too loosely, leading to disputes.
What is the best metric for an earn-out?
Revenue-based earn-outs are often simpler; EBITDA-based earn-outs are closer to value but more dispute-prone unless accounting rules are tight.
Should sellers accept an earn-out without audit rights?
Usually no. Without reporting and audit rights, earn-outs become difficult to verify and enforce.
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