Earn-out

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

An earn-out is part of an acquisition price that is paid later, and only if the business reaches agreed targets, usually for revenue or EBITDA, in the years after completion. Under IFRS an earn-out payable in cash is usually recorded as a liability at fair value and remeasured at each reporting date. A lender treats it as a claim on future cash that falls due when the business does well, so it often allows payment only while covenants are met, and reads the targets for what they reward: a seller who stays on to run the business has every reason to lift short-term earnings.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.