Earn-Outs in Saudi Arabia: Structuring Price, Performance and Post-Closing Risk

Earn-outs in Saudi Arabia let a buyer defer part of the acquisition price until the target business reaches agreed results after closing. They can bridge a valuation gap, but only if the sale agreement defines the formula, operating rules, information rights, payment process, and dispute mechanism with enough precision to prevent later manipulation.

Buyers and sellers often value the same company differently. The seller focuses on expected growth, while the buyer may hesitate to pay today for results that have not yet been achieved. An earn-out can help bridge that difference by linking part of the purchase price to future performance.

What Is an Earn-Out?

An earn-out is a conditional part of the purchase price paid after an acquisition closes. The buyer pays it if the acquired business reaches agreed financial, operational, or commercial targets. The acquisition agreement should define the targets, calculation method, performance period, review procedure, payment date, and process for resolving disagreements.

In simple terms, the buyer pays one amount when the transaction closes and may pay an additional amount later.

The later payment commonly depends on targets such as:

• revenue;
• EBITDA or net profit;
• customer retention;
• completion of a major contract;
• receipt of a regulatory approval; or
• Another measurable business milestone.

An earn-out therefore divides the purchase price into a fixed amount and a conditional amount.

How Does an Earn-Out Work?

An earn-out usually has three stages.

First, the parties agree on the amount payable at closing. The seller receives this amount when the shares or business assets transfer to the buyer.

Second, the parties set a performance period. This may cover one financial year or several years after closing.

Third, they calculate the additional payment by comparing the company’s actual performance with the targets stated in the acquisition agreement.

For example, the parties might agree that:

• the buyer pays SAR 30 million at closing;
• the seller may receive up to SAR 10 million more;
• the additional amount depends on revenue generated during the following two financial years; and
• An independent accountant resolves calculation disagreements.

If the business reaches the upper target, the seller may receive the full additional amount. If the business achieves only part of the target, the seller may receive a reduced payment. If the business does not reach the minimum threshold, no earn-out may become payable.

The agreement must explain exactly how each result affects the payment.

Terms such as “revenue,” “profit,” “customers,” “completed contracts,” and “operating costs” can have different meanings. The parties should not leave those definitions until after closing.

Why Do Buyers and Sellers Use Earn-Outs?

Buyers Can Limit Valuation Risk

A buyer may not want to pay the full requested price where the target company relies heavily on forecasts, untested products, a small group of customers, or contracts that have not yet produced revenue.

An earn-out links part of the price to actual results.

It does not remove the commercial risks of the acquisition, but it may reduce the amount paid for expected performance that never materializes.

Sellers Can Preserve Additional Value

A seller may believe that the business will grow significantly after closing. Accepting only the buyer’s lower valuation could prevent the seller from receiving value for that expected growth.

The earn-out gives the seller an opportunity to receive an additional payment if the company reaches the agreed targets.

This may be particularly relevant where the business has recently entered a new market, launched a product, secured important contracts, or invested in expansion that has not yet produced its full financial return.

Earn-Outs Can Support Negotiations

An earn-out can help parties complete an acquisition when they agree on the business’s present value but disagree about its future potential.

However, the mechanism does not eliminate the valuation disagreement automatically. Poor drafting may simply postpone the disagreement until the payment becomes due.

The parties should therefore treat the earn-out as a detailed transaction mechanism, not as a short paragraph added at the end of negotiations.

Does Saudi Law Allow Earn-Outs in Business Acquisitions?

Saudi legislation does not treat an earn-out as a separate type of regulated financial product. Parties ordinarily create the mechanism through the share purchase agreement, asset purchase agreement, or another acquisition document.

The Civil Transactions Law, which came into force on 16 December 2023, provides the general legal framework for contractual obligations. It requires parties to perform valid contracts according to their terms and in a manner consistent with good faith. It also addresses conditional obligations and indicates that an obligation should not depend entirely on the unrestricted discretion of the party that must perform it.

In practical terms, a buyer should not have an unlimited right to decide whether the seller has earned the payment. The contract should use objective criteria, supporting records, a review procedure, and an independent dispute mechanism.

Read also: Breach of Contract: Legal Remedies in Saudi Arabia

The Companies Law, issued under Royal Decree No. M/132 of 1443H and effective from 19 January 2023, governs Saudi company structures and corporate approvals. The transaction may also require shareholder resolutions, updates to corporate records, or amendments to constitutional documents, depending on the company type and acquisition structure. The Ministry of Commerce administers these procedures for most private companies.

What Must an Earn-Out Clause Include?

1. A measurable performance target

The agreement should identify the exact measure that determines payment.

Common options include:

Metric	Simple meaning	Main drafting concern
Revenue	Money generated from sales	Returns, discounts, related-party sales, and timing
EBITDA	Earnings before certain finance, tax, and accounting charges	Cost allocation and accounting policy changes
Net profit	Profit after agreed expenses	Management decisions and exceptional costs
Commercial milestone	A defined event, such as obtaining approval or winning a contract	Whether the event occurred and who controlled it
Customer retention	Maintaining named customers or contracts	Renewals, cancellations, and replacement contracts

Revenue may appear easier to calculate than profit. However, the parties must still decide when revenue counts, how they treat cancellations, and whether sales to affiliates qualify.

EBITDA can reflect operating performance more closely, but it creates more room for disagreements about expenses and accounting treatment.

2. A clear calculation formula

The contract should explain how the earn-out moves from zero to the maximum amount.

For example, the agreement might provide:

• no earn-out below an agreed revenue threshold;
• a proportional payment within a specified range; and
• a maximum payment once the company reaches the upper target.

The formula should address partial achievement. It should not leave the payment to later negotiation.

3. Fixed accounting rules

The agreement should state which accounting standards, policies, and historical practices apply.

It should also explain how to treat:

• exceptional or one-off costs;
• management fees charged by the buyer or its group;
• costs of integrating the acquired company;
• changes in depreciation or provisions;
• transactions with related companies;
• acquisitions or disposals made during the earn-out period; and
• Currency conversion, where relevant.

Without these rules, two accountants may calculate very different results from the same business performance.

4. The earn-out period

The parties should specify the start date, end date, and reporting periods.

A longer period may give the seller more time to achieve the targets. It also keeps the buyer and seller financially connected for longer.

The agreement should cover events that interrupt the period, such as a sale of the target, business closure, restructuring, merger, or change of control.

5. Rules for operating the business

This is often the most sensitive part of the negotiation.

After closing, the buyer should normally retain enough freedom to manage its investment. The seller, however, needs protection against decisions aimed at reducing the earn-out.

The agreement may restrict the buyer from:

• diverting customers or revenue to another group company;
• changing the target’s accounting policies solely to reduce the payment;
• imposing excessive group charges;
• stopping an agreed product line without a commercial reason;
• delaying invoices or contract completion beyond the measurement period; or
• Taking steps primarily intended to prevent the earn-out target from being reached.

These protections should remain specific. A broad promise to operate the business “normally” may not explain what the buyer can and cannot do.

6. Information and inspection rights

The seller will need enough information to verify the calculation.

The agreement can require the buyer to provide periodic management accounts, financial statements, customer reports, or supporting documents.

It should also give the seller a defined period to review the calculation and submit objections. The buyer should then have a defined period to answer.

Confidentiality and data-protection obligations should continue to apply during this process.

7. Payment timing and security

The agreement should state when the buyer must pay the earn-out after the final calculation.

The seller may also request security, particularly where the payment period lasts several years. Depending on the transaction, the parties may consider a guarantee, retention arrangement, security over assets, or an escrow structure that complies with the applicable legal and banking requirements.

The parties should assess whether the security remains effective if the buyer restructures, becomes insolvent, or transfers the acquired business.

How Can Buyers Protect Themselves?

A buyer should not accept operating restrictions that prevent it from responding to market conditions.

The agreement should preserve the buyer’s right to make genuine commercial decisions, integrate the target, comply with regulatory requirements, and address financial or operational problems.

The buyer should also define circumstances that exclude or adjust the earn-out. These may include the departure of key sellers who agreed to remain in management, loss caused by pre-closing misconduct, or failure to provide agreed transition support.

Any exclusion must remain objective and proportionate. A clause that gives the buyer complete discretion to cancel the payment may face greater legal and evidential risk under the general Saudi rules governing contractual and conditional obligations.

How Can Sellers Protect Themselves?

The seller should focus on the buyer’s control over the target after closing.

Useful protections may include:

• consistent accounting policies;
• restrictions on diverting revenue;
• limits on related-party charges;
• access to financial records;
• notice before material changes to the business;
• acceleration of the earn-out if the buyer sells or closes the target;
• protection against deliberate interference with performance; and
• an independent expert process for calculation disputes.

Where the seller remains as a manager or employee, the parties should coordinate the earn-out provisions with the employment, management, and incentive documents.

A seller’s dismissal may affect both employment rights and the earn-out. The documents should explain whether termination changes the payment and whether different rules apply to resignation, misconduct, redundancy, illness, or termination without cause.

Which Saudi Approvals May Affect the Transaction?

The earn-out itself forms part of the purchase price, but the wider acquisition may require regulatory action.

A foreign buyer must consider the Investment Law under Royal Decree No. M/19 of 1446H, effective from February 2025, and its Implementing Regulations issued by Ministerial Decision No. 1086 dated 7 February 2025.

Foreign investors generally need MISA registration before undertaking investment activities. A change in ownership involving an excluded or restricted activity may also require prior approval.

The parties should also assess:

• Ministry of Commerce filings and corporate approvals;
• General Authority for Competition review where the transaction qualifies as an economic concentration;
• sector-specific consent for regulated activities; and
• Capital Market Authority requirements where the target or transaction involves a listed company.

The General Authority for Competition has authority to review economic concentrations under the Saudi competition framework. The parties should complete that analysis before fixing the transaction timetable.

Read also: MISA License Explained for Foreign Investors

An earn-out should not become payable for a period during which the transaction could not legally close or the buyer could not exercise the agreed control.

How Should Tax Issues Be Handled?

The parties should review the tax treatment before signing, not when the first earn-out payment becomes due.

The treatment may depend on whether the deal involves shares or assets, whether the seller is Saudi or foreign, how the agreement characterizes the payment, and whether the seller continues to provide employment or management services.

The parties should clearly separate:

• purchase price;
• salary or management remuneration;
• non-compete payments;
• consulting fees; and
• interest or financing elements.

Saudi tax matters fall under the administration of the Zakat, Tax and Customs Authority. Zakat generally applies to the Saudi or GCC-owned share at 2.5%, while corporate income tax generally applies to the foreign-owned share at 20%. VAT applies at 15%, although the treatment of a business transfer or individual payment depends on the facts and applicable rules.

Read also: Corporate and Income Tax in Saudi Arabia

The acquisition agreement should allocate responsibility for filings, documentation, withholding, and cooperation with ZATCA.

What Happens If the Parties Disagree?

Earn-out disputes usually concern numbers, business conduct, or both.

A calculation dispute may ask whether the company reached the agreed revenue or profit target. An operating-conduct dispute may ask whether the buyer diverted sales, increased costs, or otherwise affected performance.

The agreement should send accounting questions to an independent accountant or financial expert. It should reserve wider contractual questions for the agreed court or arbitral tribunal.

The clause must explain whether the expert acts as an expert or arbitrator, which issues the expert may decide, how the parties select the expert, and how they allocate costs.

Read also: Commercial Arbitration Rules in Saudi Arabia

For larger or cross-border acquisitions, the parties may choose institutional arbitration. The Saudi Center for Commercial Arbitration provides arbitration rules and model clauses that parties can adapt to the transaction, including the seat, language, and number of arbitrators.

Practical Questions to Resolve Before Signing

Before agreeing to an earn-out, the parties should be able to answer the following questions:

1. What exact event or financial result triggers payment?
2. Who prepares the calculation?
3. Which accounting policies apply?
4. Can the buyer reorganize or integrate the business?
5. What information will the seller receive?
6. What happens if the company loses a key customer?
7. What happens if the buyer sells the business?
8. Does the earn-out accelerate after a change of control?
9. Does the seller need to remain employed?
10. Which expert, court, or tribunal resolves a dispute?
11. How will the seller enforce an unpaid amount?
12. Have the parties reviewed the tax and regulatory treatment?

If the agreement does not answer these questions, the earn-out remains incomplete.

Structure the Earn-Out Before the Deal Is Signed

An earn-out can unlock a Saudi acquisition where the parties cannot agree on the target’s future value. It works best when the agreement converts forecasts into objective rules and gives both sides a fair method for testing the final calculation.

Read also: Legal Disadvantages of Doing Business in Saudi Arabia for Foreign Investors

Hamad in Association with Youssry Saleh & Partners can review the proposed valuation model, draft the earn-out provisions, coordinate them with the acquisition and management documents, and identify the Saudi corporate and regulatory approvals required before closing. Early legal review helps the parties address payment risk while they still have room to negotiate.

For customized legal consultation, please contact us at info@ahysp.com.

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