An earn-out ties part of the price to performance
An earn-out holds back part of the purchase price and pays it only if the business meets agreed targets after completion. It bridges the gap between a buyer who will not pay today for performance it has not seen, and a seller who believes the business will deliver. The targets are usually financial, such as EBITDA, revenue, or gross profit, and sometimes operational, such as a product launch or a retained customer. The payment depends on how the business performs after the sale. So an earn-out is the clause corporate lawyers in Dubai see argued over more than any other in a share purchase agreement.
An earn-out is not the same as deferred consideration, and the two are often confused. Deferred consideration is a fixed part of the price, paid later on a set date, and it does not depend on performance. An earn-out is contingent. The seller receives it only if the targets are met, and receives nothing if they are not. Deferred consideration is a timing question. An earn-out is a risk question, and the risk falls on the seller.
The reason earn-outs are common is a disagreement about value. The buyer prices the business on what it can prove today. The seller prices it on what it expects tomorrow. An earn-out lets each side hold its own view and settle the difference later, against real results. Buyers and sellers use it when they cannot agree a single number at completion.
Whether a UAE court will enforce the formula
An earn-out is only as good as its enforceability, and that turns on where the deal is governed. Onshore UAE is governed by civil law under the Civil Code, replaced from 1 June 2026 by Federal Decree-Law No. 25 of 2025. A civil law contract needs a determined or determinable price. An earn-out with a clear formula is determinable, so a court can enforce it. An earn-out that leaves key terms to be agreed later risks being treated as an unenforceable agreement to agree, or void for uncertainty.
DIFC and ADGM change the picture. Both are common law jurisdictions with their own courts. Both give the parties the freedom to run a complex earn-out much as they would in London or New York. A court there will enforce a detailed formula and the covenants around it. This is why many sophisticated deals place the share purchase agreement under DIFC, ADGM, or English law with arbitration, rather than under onshore law, when the price mechanism is heavy.
The forum decides more than the law. A judgment or award has to be enforced against the buyer where its assets are, so the governing law, the seat, and the enforcement route should be chosen together. An earn-out drafted under a law one court will not readily enforce is a promise the seller may struggle to collect.
Who controls the business, and how the seller is protected
An earn-out creates a hard tension. After completion the buyer owns and runs the business, yet the seller's remaining money depends on how that business performs. A buyer that cuts investment, moves revenue to a sister company, or changes the accounting can lower the earn-out without breaking an obvious rule. The agreement has to close that gap, or the seller is left trusting the party with every reason to pay less.
Two sets of terms do that work. The first is a set of covenants on how the buyer runs the business during the earn-out period. These commonly require the business to be run in the ordinary course, and bar a restructuring that would distort the targets. They also fix the accounting policies used to measure the targets, and stop revenue or cost moving between the buyer's companies. The second is the seller's right to information, so it can see the figures behind the calculation and check them, sometimes with an audit right.
The metric itself causes most disputes. A target stated as profit, without defining which accounting standard applies, how related-party transactions are treated, and which costs are included, invites two honest readings and one argument. The valuation and exit terms that decide the number should be written so that two accountants reach the same result. Precision here is worth more than any warranty.
How earn-out disputes are settled
Even a well-drafted earn-out produces arguments over the final figure, so the agreement should say in advance how they are resolved. The common route sends a calculation dispute to an independent expert, usually an accounting firm, whose determination is final and binding. This is faster than a full claim. On a large deal, though, the leading firms are often conflicted, and the parties must find an alternative before it can move. Anything that is not a pure accounting dispute, such as a breach of the run-the-business covenants, is better left to arbitration or the chosen court.
Payment and security need the same attention. An earn-out is usually paid in annual instalments, a set number of days after each period's accounts are finalised. It is often capped, so the buyer knows its maximum exposure. Until it is paid, the seller is an unsecured creditor for the amount, which means the seller ranks behind secured lenders if the buyer fails. A seller that wants more comfort can ask for a bank guarantee or an escrow. Escrow is not yet a common feature of UAE deals, and it has to be negotiated.
One further point catches sellers who stay on to run the business. Where the seller becomes an employee and the earn-out looks tied to continued employment, a tax authority may treat part of it as employment income rather than sale consideration. The structure of the deal and the corporate tax position should be checked with the Federal Tax Authority rules in mind before the earn-out is agreed.
How should buyers and sellers structure a UAE earn-out in 2026?
A UAE earn-out works when three things are settled at the outset. The formula is precise enough that two accountants reach the same figure. The governing law and forum can enforce it. And the covenants stop the buyer running the business in a way that depresses the number. Miss any of the three, and the earn-out becomes the part of the deal the parties litigate.
The split of risk is the point to keep in view. The buyer defers cash and takes the credit and drafting risk. The seller takes the performance risk and, until payment, ranks as an unsecured creditor. Each side should price that risk before signing, not discover it when the first measurement period closes and the figures do not match the expectation.
Buyers and sellers negotiating an earn-out on a UAE transaction face three linked decisions: the price mechanism, the governing law and forum, and the covenants on running the business. Our corporate lawyers in Dubai advise on all three, and on the dispute terms that decide whether the earn-out is paid.
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