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
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- What Excel skills are most important for FDD?
- Walk me through how you'd start analyzing a company you know nothing about.
- What are the key differences between FDD in the US and Germany/DACH?
- How do you handle a carve-out in FDD?
- What is a Vendor Due Diligence (VDD) report and how is it different?
- How do you assess the quality of a company's financial reporting?