Valuation gaps frequently stall acquisitions of privately held African businesses. Sellers point to historical momentum and expansion plans, while buyers discount projections against currency depreciation, inflation and execution risk.
An earn-out offers an obvious compromise. The buyer pays a portion of the purchase price upfront, while the remainder is tied to the commercial performance of the business over an agreed period, typically between 12 and 36 months.
Yet poorly designed earn-outs remain one of the most common causes of post-acquisition litigation. When expectations and operating boundaries are ambiguous, the deferred payment mechanism damages the relationship between the founder and the new owner.
The danger of earnings-based metrics
The primary source of deal friction is the choice of financial metric. Buyers often push for earn-outs tied to net profit or Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA), arguing these reflect real commercial returns.
For a selling founder, an EBITDA-linked earn-out carries severe structural risks. Operating profit is easily diluted by corporate overheads, central management fees, elevated transfer prices or marketing expenses allocated by the parent entity.
A founder may deliver record volumes, only to find the business posting lower operating margins due to costs entirely outside their control. In contrast, pure top-line revenue metrics can tempt an outgoing operator to chase uncollectible sales or offer unsustainable discounts.
To structure earn out creating future conflict down the line, parties often find middle ground in gross profit or contribution margin. Gross profit captures revenue volume and direct input costs while excluding arbitrary corporate reallocations.
Ring-fencing operations and accounting standards
Disputes frequently arise when an acquired company is rapidly integrated into the buyer’s broader operations. Once sales pipelines, inventory and administrative teams merge, verifying the standalone performance of the acquired unit becomes contentious.
Agreements should require the acquired business to maintain ring-fenced financial records throughout the earn-out period. This includes maintaining dedicated bank accounts, distinct accounting ledgers and clear protocols for allocating shared commercial software or logistics assets.
The purchase agreement must also lock down the precise accounting framework. Parties should define how revenue recognition, inventory obsolescence, currency translations and bad debt provisions are handled, rather than relying on a general reference to local accounting standards.
Establishing operational autonomy and covenants
When selling founders remain as managing directors to achieve earn-out targets, operational control becomes an immediate flashpoint. If the buyer freezes capital expenditure, cuts headcount or reassigns key sales executives, reaching the agreed performance thresholds becomes impossible.
The contract must contain explicit operating covenants. These covenants should define the founder’s daily hiring and spending limits while obliging the buyer to support agreed working capital levels and marketing budgets.
Agreements should also address fundamental changes initiated by the buyer. If the parent company pivots strategy, changes the corporate brand or terminates critical commercial lines, the agreement should trigger an automatic acceleration clause paying out the balance of the earn-out.
Independent arbitration for disputed calculations
Even with precise contractual language, differences in interpretation occur when the final performance figures are audited. Leaving such disagreements to national courts can freeze capital for years and undermine the enterprise value of the operating company.
The transaction documents should provide a mandatory, fast-track settlement process. The buyer prepares the initial calculation, the seller receives a specific window to review and lodge formal objections, and unresolved items transfer immediately to an agreed independent accounting firm acting as an expert rather than an arbitrator.
This mechanism isolates financial disputes from broader contractual claims, ensuring final determinations are grounded strictly in accounting principles within a defined 30-day window.
Action for business owners
Before executing a term sheet with a deferred consideration component, model every proposed earn-out metric under severe macroeconomic stress scenarios. Calculate how your payout would be affected by a sharp currency devaluation, higher input tariffs or parent-company management charges, and write explicit caps on operational reallocations directly into the non-binding offer letter.
