Why earn-out is so common in SME transactions
In the sale of Swiss small and medium-sized enterprises, the agreed price rarely consists of a single wire transfer at closing. Buyer and seller often negotiate a variable consideration — known as an earn-out — tied to the achievement of future targets: revenue, EBITDA, operating margin, client retention or post-acquisition integration. The mechanism helps bridge a valuation gap when the company's prospects are uncertain or when the seller remains operationally involved during a transition period.
For the seller, an earn-out can mean additional compensation if the business performs as promised. For the buyer, it represents protection against the risk of overpaying based on optimistic projections. However, contractual flexibility conceals significant complexity: accounting for contingent consideration, the timing of taxation and the risk of dispute if metrics are not defined with precision.
This guide examines earn-out and similar clauses in the context of transactions between Swiss SMEs — transfer of a business under Art. 181 CO, sale of GmbH shares or AG shares — with reference to Swiss accounting standards (CO, FER/GAAP) and the most common federal and cantonal tax aspects, updated for 2026.
Variable consideration mechanisms: earn-out, holdback and milestone
Not all deferred payments are earn-outs. Correctly categorising contractual clauses is the first step towards consistent accounting and taxation:
| Mechanism | Economic rationale | Typical trigger | Risk profile |
|---|---|---|---|
| Earn-out | Adjustment of the purchase price based on the future performance of the acquired target | EBITDA, revenue, margin or operating KPIs over 1–3 financial years | High — depends on post-closing management and accounting definition |
| Holdback / escrow | Retention of a portion of the fixed price as security for indemnities or hidden liabilities | Time expiry or resolution of claims (warranties) | Medium — linked to pre-existing liabilities, not future growth |
| Milestone payment | Additional payment upon the occurrence of a discrete, verifiable event | Regulatory approval, renewal of key contract, product launch | Medium-low — binary event, easier to audit |
| Vendor loan / vendor note | Portion of the price deferred as financing from the seller to the buyer | Contractual maturity dates and interest | Low for performance — credit risk and interest rate |
In practice, SME sale agreements often combine several instruments: a fixed price at closing, a holdback in escrow for warranties and an earn-out linked to results in the first two financial years under the new ownership. Clearly separating the items in the contract prevents a tax authority or auditor from reclassifying amounts into categories other than those intended.
Structuring the earn-out: clauses that make the difference
Most post-closing disputes arise from vague accounting definitions. A well-drafted earn-out must answer these questions in a binding manner:
Metrics and measurement period
Specify whether the earn-out is based on normalised EBITDA, EBIT, operating cash flow or recurring revenue (ARR). State explicitly the period (e.g. financial years 2026 and 2027 under Swiss commercial accounting) and whether an average or multi-year cumulative calculation applies.
Define permitted adjustments: extraordinary costs, seller compensation, integration expenses, unapproved capex investments. Without a definition of working capital and a normalisation clause, the parties will interpret the same financial statements differently.
Operational control and seller obligations
If the seller remains as a consultant or manager during the earn-out period, the contract must establish whether they can influence results (commercial policy, pricing, hiring). The buyer will tend to reserve broad discretion; the seller will seek a covenant preventing decisions that deliberately penalise the metric.
Provide for access to accounting records, challenge periods (30–60 days from completion of the audit) and, in case of disagreement, an independent accountant with an expedited procedure.
Cap and floor, pro-rata and acceleration
Set a maximum payable amount (cap) and, if negotiated, a guaranteed minimum (floor). Establish how pro-rata payment is calculated if the metric partially exceeds the threshold — linear formula, tiered structure or declining multiple.
Regulate the effect of an extraordinary event: sale of the acquired business to a third party, merger, liquidation or early departure of the seller (acceleration clause or forfeiture of remaining earn-out).
Warranties and set-off
Clarify whether the buyer may set off indemnities for breach of warranties against earn-out amounts due. The seller prefers non set-offable or limited structures; the buyer wants a single recovery mechanism.
Document holdback and earn-out separately: combining them complicates both proof of damage (Art. 97 CO) and the tax distinction between sale consideration and damages.
Accounting on the buyer's side (Swiss GAAP/FER)
For a buyer applying Swiss accounting standards (Code of Obligations and, where adopted, FER/GAAP SME or Swiss GAAP FER), the acquisition of a business or branch of operations requires application of the acquisition method. In consolidated financial statements under Swiss GAAP FER 30, contingent consideration — including earn-out — must be recognised at the acquisition date if a cash outflow is probable, measured in accordance with FER 23; subsequent changes generally adjust goodwill (FER 30/23; principles analogous to IFRS 3).
In practice, this means three operational steps relevant for users of Accountex or similar accounting software:
| Phase | Accounting treatment | Balance sheet impact |
|---|---|---|
| At closing date | Estimate of earn-out if outflow is probable (probability × expected amounts, discounted under FER 23 if payment is beyond 12 months). Total consideration increases acquisition cost above the fixed price alone. | Higher goodwill or negative goodwill; liability for contingent consideration on the balance sheet |
| At each year-end | Remeasurement of the liability if payment estimates change (performance better or worse than expected). The difference generally adjusts goodwill, with income statement effect spread through amortisation. | Change in profit or loss — often not tax-deductible if the earn-out relates to acquisition of a shareholding |
| On actual payment | Settlement of the recorded liability; any difference from the booked liability if not already corrected in prior remeasurements. | Cash outflow; no further expense if the liability was correctly estimated |
If the earn-out is classified as equity-settled consideration (payment in shares of the acquiring company) rather than cash, treatment may differ: the link to the seller's continued employment or consultancy may lead to part of the payment being reclassified as remuneration for services, recognised in the income statement over the service period.
For material acquisitions below the threshold for an ordinary audit, documentation of the initial estimate (probability model, sensitivity analysis) is essential for the auditor. Keeping the sale agreement, earn-out schedule and annual reconciliations in the acquisition file facilitates audit and future due diligence.
Accounting on the seller's side
The seller's accounting treatment depends on the nature of the transaction and the legal form:
Transfer of business or branch of operations (Art. 181 CO)
The selling company derecognises the transferred balance sheet items and recognises the consideration (fixed + fair value of earn-out if reliably measurable). Uncertain earn-out may be accounted for only when realised (realisation principle) if the estimate is not reliable — common practice in SMEs not subject to full Swiss GAAP FER.
Any gain on disposal of a branch of operations flows through the selling company's income statement and contributes to ordinary corporate taxable income.
Sale of GmbH shares or AG shares
The target company does not record the earn-out: consideration is paid directly to the selling shareholder. At corporate level, relevant only if the sale triggers deconsolidation or discontinuation of operations.
An individual shareholder does not maintain commercial accounts for the earn-out; they recognise the proceeds on receipt or under the accrual principle if mandatory commercial accounting applies as a sole proprietor with double-entry bookkeeping.
Swiss taxation: when earn-out tax is due
The tax impact of an earn-out varies significantly depending on whether the seller transfers business assets, company shares or shares held as private assets:
| Seller scenario | Tax classification | Timing of taxation | Cantonal notes |
|---|---|---|---|
| Individual — sale of GmbH shares / AG shares (private assets) | Generally private capital gain exempt from income tax (Art. 16 para. 3 DBG and Art. 7 para. 4 lit. b StHG), if the earn-out forms part of the sale consideration and is not recharacterised | Tax realisation on receipt of each tranche; the variable portion crystallises on payment | Watch for recharacterisation as employment income and qualification as professional securities dealer; verify with the competent cantonal authority |
| Individual — transfer of sole proprietorship or branch of operations | Self-employment income / business gain — not private capital gain | Year of receipt of each earn-out payment | Progressive cantonal and municipal income tax rate; treatment as income from independent activity |
| Selling company (GmbH/AG) | Gain on disposal of assets — profit taxed at corporate rate | Accrual in the year of vesting if highly reliable; otherwise on receipt | Federal rate 8.5% on net profit + cantonal/municipal rate |
| Earn-out reclassified as remuneration (consulting / employment) | Employment or self-employment income — OASI, pension fund, accident insurance | Year in which the right to payment vests | Withholding tax on salary and OASI/pension contributions if structured as employment; watch for recharacterisation by the FTA and cantonal authorities |
The Federal Tax Administration distinguishes between consideration for the transfer of capital and remuneration for post-closing services. If the seller remains on the payroll and the earn-out is calculated on metrics depending solely on their personal work (number of contracts signed by them), the tax authority may qualify the entire variable amount as employment income, with consequences for social contributions and income tax progression.
On the buyer's side, accounting adjustments for the earn-out (goodwill adjustment and related amortisation) are not automatically deductible: if the acquisition concerns qualified participations, the cantonal deal-value approach may exclude deductibility of changes in contingent consideration. For acquisitions of a branch of operations, earn-out paid generally increases acquisition cost and any goodwill amortisation — with a deductible effect spread over the years.
For cross-border transactions (foreign seller or buyer), verify double taxation treaties, notification obligations and possible withholding tax on payments abroad. Advance tax advice is recommended when the earn-out exceeds 20–30% of the total price.
Numerical example: sale of a services SME in Ticino
An entrepreneur sells 100% of the shares in a Ticino IT consulting GmbH. Negotiated structure:
- Fixed price:CHF 800,000 at closing
- Holdback:CHF 100,000 in escrow for 18 months (warranties)
- Earn-out:Up to CHF 400,000 if normalised EBITDA ≥ CHF 250,000/year in financial years 2026–2027
- Formula:CHF 2 for every CHF 1 of EBITDA above CHF 200,000, cap CHF 200,000/year
Buyer side: at closing estimates the earn-out at CHF 180,000, considering an outflow probable (45% probability of reaching the thresholds). Consideration booked: CHF 980,000 (800,000 + 180,000). Recognises goodwill or net assets according to purchase price allocation. At end of 2026, normalised EBITDA of CHF 280,000 generates earn-out due of CHF 160,000; remeasures the liability and adjusts goodwill by CHF 20,000 if the estimate was lower (income statement effect via amortisation).
Seller side (individual, shares as private assets): the capital gain on the fixed price of CHF 800,000 (consideration minus acquisition cost) generally falls within private capital gain exempt from income tax, subject to recharacterisation or qualification as professional securities dealer. The earn-out of CHF 160,000 received in 2027 forms part of the same capital gain and is tax-realised in the year of receipt. The holdback released without claims in 2027 similarly contributes to consideration in the year of receipt.
Critical point: if the seller signs a consultancy agreement with fixed annual compensation of CHF 120,000 and the earn-out contains no normalisation clauses for their costs, the resulting EBITDA could be artificially low — hence the importance of a clause excluding seller compensation from the calculation or normalising the cost of replacement labour.
Contractual risks and how to mitigate them
Accounting ambiguity
Metrics not aligned with the chart of accounts or applicable accounting principles. Mitigation: attach an agreed Excel model and a sample calculation on audited historical data.
Post-closing manipulation
The buyer delays investments or shifts revenue to reduce the earn-out. Mitigation: ordinary course of business covenant, prohibition of non-arm's length intra-group transfers, seller's right to appoint an accounting observer.
Tax recharacterisation
The FTA qualifies the earn-out as disguised salary. Mitigation: separate employment contract and earn-out, tie the metric to objective business performance, avoid payments proportional to hours worked by the seller.
Buyer's insolvency
Earn-out unpaid due to bankruptcy or restructuring. Mitigation: bank guarantee or payer insurance, partial escrow of earn-out accrued quarterly, contractual priority (limited effectiveness in Swiss insolvency proceedings).
Misalignment between parties
The seller targets short-term EBITDA maximisation; the buyer invests for long-term growth. Mitigation: earn-out on contracted revenue rather than margin, or split between immediate payment and deferred payment linked to client retention.
Operational checklist for entrepreneurs and trustees
Before signing a letter of intent with an earn-out component, verify the following points with your tax adviser and auditor:
| Area | Check |
|---|---|
| Contract | Written definition of normalised EBITDA, exclusions, period, cap/floor, dispute procedure and set-off with warranties |
| Buyer accounting | Documented estimate of probable earn-out, contingent consideration liability account, annual remeasurement plan in Accountex |
| Seller accounting | Recognition policy (fair value vs realisation), reconciliation between contract and disposal closing entries |
| Taxation | Cantonal opinion on private capital gain vs employment income; income tax and corporate tax simulation on min/med/max scenarios |
| Social security | If the seller remains in the business: verify OASI/pension base on fixed compensation and possible split of earn-out |
| Documentation | Acquisition file with normalisation financial statements, earn-out model and board minutes approving the transaction |
Conclusion: balancing flexibility and certainty
Earn-out is a legitimate and widely used instrument to align buyer and seller interests in transactions between Swiss SMEs. Its commercial utility must not, however, obscure the impact on the balance sheet, taxes and the relationship between the parties in the two or three years following closing. A well-structured variable price costs legal time during negotiation, but drastically reduces the risk of accounting arbitration or tax dispute.
With disciplined accounting — probable recognition of earn-out on the buyer's side (FER 30/23), consistent recognition on the seller's side — and cantonal tax simulation before signing, entrepreneurs and trust firms can integrate earn-out into the disposal process without surprises. Accountex enables tracking of contingent liabilities, reconciliation of deferred payments and documentation of balance sheet adjustments linked to the acquisition, maintaining control over liquidity and profit or loss during the critical post-deal period.