Answers / Financial Due Diligence
What is an earn-out and how does FDD support it?
An advanced Financial Due Diligence question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
An earn-out is contingent consideration: additional payments if the target achieves financial milestones post-closing. FDD supports by: (1) assessing whether the earn-out targets are achievable based on historical trends, (2) analyzing whether the buyer can manipulate the earn-out metric, (3) recommending appropriate metrics (revenue is harder to manipulate than EBITDA), (4) defining measurement methodology in the SPA. 50%+ of earn-outs end in disputes.
WHAT INTERVIEWERS LISTEN FOR
- ✓Contingent consideration definition
- ✓Achievability of earn-out targets
- ✓Buyer manipulation risk
- ✓Appropriate metric selection
- ✓Measurement methodology in SPA
COMMON MISTAKES
- ✗Ignoring dispute statistics
- ✗Confusing earn-out with escrow
- ✗Assuming all metrics are equally reliable
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