Saudi M&A Earn-outs: A Clever Way to Heal Painful Valuation Gaps

In Saudi deal talks, price can be the hardest point to close. Buyers often anchor value in evidence and risk. Sellers often anchor value in the future they believe they will deliver. That difference can stall negotiations, especially when performance is uncertain and each side has a different risk tolerance.

This is where earn-outs and other contingent payments help. An earn-out is a contractual clause in a share purchase agreement. It makes part of the purchase price variable and dependent on an uncertain future event. The buyer pays an agreed amount at completion, then may pay a top-up later if the target meets agreed performance goals after the deal closes.

These structures are commonly used when valuation depends more on future results than on historical numbers. That can apply to high-growth companies, founder-led businesses, technology platforms, and businesses in operational transition. In a subdued M&A market, earn-outs have come back into focus as sellers look back to peak valuations seen in 2021, while buyers look for more favourable opportunities.

How to Structure Saudi M&A Earn-Outs Without Losing Control

Start with the performance metric. Parties can tie the earn-out to revenue, profit, EBITDA, gross profit, customer acquisition levels, or operational milestones like product launches or regulatory approvals. The metric should be objectively measurable. Some metrics can create added complexity. For example, EBITDA-based earn-outs can be affected by accounting policies, which can trigger disputes if the rules are not clear.

Next, set the measurement period. Earn-outs commonly run for one to three years after the transaction. Another approach is to define a period of ideally 2–3 years, and even split it into smaller sub-periods. This timing matters. Short periods may not capture long-term value creation, while longer periods can increase the risk that operational changes distort how performance is measured.

Then define exactly how payments unlock. Payments can be made in cash, equity, or a mix. The trigger can be binary (paid once a target is hit) or based on a sliding scale (more performance, more payment). Clear goals are critical. Sellers may also seek covenants on the buyer’s post-closing conduct, so the business is positioned fairly to reach the thresholds even after control shifts.

Finally, remember that earn-outs are not a one-size-fits-all tool. Some valuation gaps may fit better with a price adjustment or seller financing, especially when risk depends on factors outside the seller’s control. Even when an earn-out is the right bridge, early planning matters. One global report noted a material increase in contingent deferred payments and earnout structures in calendar year 2024, and also warned of high tax complexity around these structures.