Earn-Out vs Partial Sale in M&A

How to structure the sale of an SME: 100% acquisition or partial sale with puts and calls

Why buyers want to retain founders

In the small and medium-sized enterprise segment, a very significant percentage of M&A transactions are structured to retain founders and the management team.

When a company is small and has little management structure—that is, it is highly dependent on the entrepreneur who founded it—or when it is a technology company closely tied to the founders’ capacity for innovation and “genius,” it is crucial for the buyer that these people stay.

In many cases, the buyer’s greatest fear is that the founders will leave the day after, or a few months after, closing the transaction, leaving them with a company they do not know how to manage or grow.

But there is another fear, less explicit and very common: that the founder stays, but with much less energy than before.

An entrepreneur with several million in the bank, earning a fixed salary, may not have the same incentive to keep pushing at the same pace, or to rack their brains thinking about how to innovate or grow, even if they remain within the company.

The two most common structures in M&A with key founders

In practice, these types of transactions are usually structured in two ways:

1 Sale of 100% with earn-out
2 Partial sale (51%, 70%, etc.) with puts and calls to reach 100% later

These variable structures are not only intended to retain management. They are also a very common way of bridging valuation expectations between buyer and seller.

Many companies have a reasonable current value but expect high growth and, therefore, higher multiples in the future. When buyer and seller do not see the future in the same way, the structure becomes the solution.

The objective is similar in both cases:

▪️ Retain management
▪️ Align incentives
▪️ Share future upside and, in many cases, synergies

Case study: B2G SaaS with 25% annual growth

Let us now imagine a specific case.

A buyer wants to acquire a SaaS software company specialized in Administrative Management and Transparency in the management of electronic case files—a solution to process, store, and audit procedures, clearly oriented toward the public sector.

The company grows at a steady rate of 25% per year. Over the last twelve months it has generated €2M in revenue, with €500,000 in EBITDA, and in the last month it shows an MRR of €200,000.

It has 25 employees and two founders, each owning 50% of the capital:

The CEO, who in addition to running the company has defined the go-to-market strategy with public institutions and brings solid know-how and know-who in the institutional environment.

The CTO, who began programming the solution seven years ago and now leads a technical team of five developers.

Company valuation and buyer rationale

The buyer values the company at 4x ARR.
With an MRR of €200,000, ARR amounts to €2.4M, implying a valuation of €9.6M. This is an attractive valuation, as it is equivalent to paying almost 20 times the EBITDA of the last twelve months.

The buyer is willing to pay this price for two reasons.

1 On the one hand, the company’s business plan indicates that, maintaining 25% annual growth, in three years it could reach €4M in sales and €1.5M in EBITDA, meaning that today’s price would be equivalent to approximately 6.5x future EBITDA.

2 On the other hand, the buyer already operates in the public sector and identifies strong commercial synergies. In its most optimistic scenario, the company could reach €7M in sales and €4M in EBITDA within a three-year horizon.

The payment-at-closing dilemma

The real dilemma arises when structuring the payment. Paying the full €9.6M at closing would mean that each founder would receive close to €5M from day one, with the only additional incentive being an annual salary of around €120,000. From the buyer’s perspective, this scheme does not guarantee the same level of commitment, intensity, and ambition in the years that follow.

The way to address this risk is to introduce a mixed structure, combining a high upfront payment with a significant variable component.

Structure of the variable component

In order to secure the founders’ commitment, the offer is structured as follows:

65% of the price at closing, i.e., €6,240,000, and the remaining 35% linked to a variable scheme.

Since the goal is for the founders to remain for at least three years, the variable component is defined based on EBITDA in 2028, using the following formula:

35% × EBITDA 2028 × 8

Let us see how this works under different scenarios.

If EBITDA reaches €1.5M in 2028, the earn-out would be:

1.5M × 8 × 35% = €4.2M additional

In that case, the total price received would be €10.44M.

If the expected synergies materialize and EBITDA reaches €4M, the variable component would amount to:

4M × 8 × 35% = the nice figure of €11.2M additional

On the other hand, if EBITDA remains at €500,000, the earn-out would be:

0.5M × 8 × 35% = only €1.4M additional

The difference between scenarios is enormous. This is precisely where the logic of these types of structures becomes clear: creating a very powerful asymmetry of outcomes that pushes founders to remain committed and focused for several years after the sale.

Two ways to structure the same deal

This same deal can be structured in two different ways.

Option 1. Partial sale with puts and calls
The buyer acquires 65% of the shares for €6.24M at closing, and a put and a call are agreed on the remaining 35%, to be exercised in 2028 at an 8x EBITDA multiple.

Option 2. 100% acquisition with earn-out
The buyer acquires 100% of the shares from day one, and an earn-out is agreed calculated as:

35% × 8 × EBITDA 2028

From an economic standpoint, both structures are practically identical.
The final price depends on the same variable, the same percentage, and the same multiple.

In theory, they should be almost indifferent for founders. In practice, they are not.

Key differences between earn-out and partial sale

1 Psychological impact
In a partial sale, founders remain significant shareholders. In an earn-out, the upside feels more like a deferred bonus.

2 Flexibility of puts and calls
It may happen that neither party wants to exercise, extending the founders’ presence in the share capital.

3 Contractual complexity
A partial sale usually involves a shareholders’ agreement and greater legal complexity.

4 Dividends
As long as they retain 35%, founders can receive dividends.

5 Protection against non-payment
In a partial sale, shares are not transferred if the price is not paid.

6 Tax risk
An earn-out may generate more tax uncertainty than a deferred sale of shares.

7 Shareholder rights
Maintaining equity implies additional political and information rights.

Final reflection from my experience as an advisor

From my experience as an M&A advisor, there is not necessarily one structure that is better than the other.

Earn-outs often facilitate negotiation and documentation, which in small transactions can be key to closing. Partial sales offer more protection to the seller but introduce greater complexity and some additional risks.

In smaller transactions, buyers tend to prefer 100% acquisitions with earn-outs, both for simplicity and for the ability to consolidate results from day one. As in many M&A transactions, the debate is not only about price, but about choosing the right structure.

By Joshua Novick, partner at Bondo Advisors

Source: https://www.joshuanovick.com/p/earn-out-vs-venta-parcial-en-m-and