In most mergers and acquisitions (M&A), the most difficult negotiation usually lies not in the question of whether to buy or not, but in the question of how much to buy. For the seller, the value of the business lies not only in the existing assets or business results of today, but also in the growth potential for many years to come. In contrast, buyers are always cautious about untested expectations and are often only willing to pay for measurable values at the time of the transaction. It is the gap between these two perspectives that causes many M&A deals to last for months, even collapse just before signing, even though all parties are willing to cooperate.
It is no coincidence that Earn-out appears more and more in deals related to technology businesses, artificial intelligence (AI), fintech, digital health or data platforms.
The value of the Earn-out mechanism in M&A
To bridge that gap, international M&A practices have developed an increasingly commonly used mechanism: Earn-out. Under this mechanism, the parties do not attempt to determine the entire purchase price at the time of signing or completing the transaction. Instead, part of the transfer price will be paid immediately, while the rest will only arise if the target business achieves pre-agreed business targets or development milestones, such as revenue, EBITDA, profit, number of customers, or the completion of a product or license by the competent authority. Earn-out is therefore considered a valuation risk allocation tool: the buyer does not have to pay upfront for the expected value, while the seller still has the opportunity to receive a price that reflects the potential of the business if those expectations become a reality.
It is no coincidence that Earn-out appears more and more in deals related to technology businesses, artificial intelligence (AI), fintech, digital health or data platforms. What these businesses have in common is that most of the value does not lie in tangible assets, but in the ability to generate cash flow in the future. An AI startup may not be profitable yet but possesses enough algorithms or datasets to change the competitive position of strategic investors. A fintech business may be accepting losses to expand its customer ecosystem. In such cases, forcing the parties to agree on a fixed price at the time of the transaction often does not properly reflect the economic value of the business. Earn-out becomes a solution that helps two parties "share" the uncertainty of the future instead of forcing one party to bear all the risks.
Because of these advantages, earn-out has become a familiar term in M&A deals in the United States, the United Kingdom, Singapore and many other developed markets. However, it is worth noting that the same mechanism is rarely applied in M&A transactions in Vietnam, especially between domestic enterprises. Many deals initially planned to use Earn-out but eventually returned to the fixed purchase price option or replaced with simpler payment mechanisms. This raises a question worth pondering: what is the reason why a tool that is considered an international practice is difficult to operate in the Vietnamese legal environment?
Earn-out mechanism is difficult in the Vietnamese market
The answer probably doesn't lie in what many people think. Earn-out is not a mechanism prohibited or restricted by Vietnamese law. In fact, the principles of freedom of agreement in the 2015 Civil Code, along with the provisions of the Law on Enterprises on the transfer of shares and contributed capital and the Law on Investment on capital contribution and share purchase activities, all allow the parties to design a mechanism to determine the purchase price according to conditions. If fully drafted, Earn-out can completely become a legal part of the M&A contract in Vietnam.
The problem is that Earn-out is not just a payment term. Behind a few lines of regulation on purchase prices is a legal mechanism that requires coordination between many different fields: taxation, accounting, corporate governance, dispute resolution and contract enforcement. In developed M&A markets, this mechanism is supported by dozens of case laws, detailed tax guidelines, uniform accounting standards and contractual practices that have been verified through thousands of transactions. It is these factors that create a "legal ecosystem" that helps Earn-out operate stably, even if the contract cannot anticipate all situations that arise.
Meanwhile, in Vietnam, what is missing is not a law on Earn-out but this legal ecosystem. Gaps in the tax treatment of variable purchase prices, the lack of accounting standards for conditional payments, uncertainties about business control after the transaction is completed, and limited dispute resolution practices make earn-out a mechanism with much higher legal costs than usual visualize. In other words, the biggest barrier to earn-out in Vietnam does not lie in the right to an agreement, but in the ability to turn that agreement into a mechanism that can be operated and enforced in practice.
Tax and accounting: When the Earn-out problem starts after the transaction completion date
The paradox of Earn-out is that the biggest legal risks of this mechanism do not appear during the negotiation or signing of contracts, but only begin when the transaction is completed. After the closing date, ownership of the business has passed to the buyer, but the final purchase price has not yet been determined. From that point on, earn-out is no longer a clause in a contract but becomes a process that lasts months or even years, in which any fluctuations in business, accounting, and taxes can change the final value of the deal.
Therefore, if contracts are the foundation of Earn-out, tax and accounting are the two factors that determine whether this mechanism can operate or not. This is also the point where Vietnam's M&A market is lacking the most.
The purchase price has been transferred, but the payment obligation has not yet ended
In ordinary capital transfer transactions, the time of completion of the transaction is also the time when the transfer price is determined and the basic payment obligation ends. Earn-outs work by a completely different logic. Ownership of the business may have been transferred shortly after the closing date of the transaction, but a significant portion of the purchase price only arises after a year or two, when the business achieves the business targets agreed upon by the parties.
It is the separation between the time of transfer of ownership and the time of full determination of the transfer price that has given rise to a series of legal issues that have not been directly addressed by Vietnam's current tax regulations.
The current corporate income tax and personal income tax regulations are built on the assumption that the transfer price has been determined at the time the transaction is completed. Earn-out, on the other hand, is a form of contingent consideration, that is, the transfer price is only fully determined when future events occur. The law currently does not have a separate guidance on how the purchase price incurred after that will be recorded, declared and handled under which mechanism.
This gap is not merely a technical problem of the tax authority but directly affects investment decisions. For the buyer, the inability to accurately forecast tax liabilities makes transaction costs difficult to control. For the seller, the lack of clarity on when to determine income and declaration obligations increases the risk of disputes with tax authorities many years after the transaction has been completed. In that context, many investors choose a fixed price or a simpler payment mechanism, although it may not reflect the economic value of the business.
Is Earn-out a transfer price or a bonus?
Another risk that is often less noticed by the parties but is decisive for the transaction structure is the legal nature of the earn-out.
In many M&A deals, especially those related to startups, technology businesses or family businesses, the seller continues to play an executive role after the transaction is completed. Investors often expect the founding team to continue managing the business for a year or two to ensure that the business is not interrupted. At that time, Earn-out is often designed at the same time as the founder's commitment to continue working.
It is here that a very fragile boundary appears. If the Earn-out is paid because the value of the business increases after the transaction, this is part of the transfer price. But if the payment is only incurred when the seller continues to hold an executive position or fulfills personal targets, the nature of the payment is easy to see as a retention bonus or labor income. This is not a problem only faced by Vietnam. The UK's Tax Authority (HMRC) has long warned of the risk of reclassification of Earn-out in cases where payment conditions are too closely tied to the post-transaction merchant-business employment relationship.
For Vietnam, although there is no specific guidance on Earn-out, this risk can completely arise in practice. That also means that the M&A lawyer needs to not only determine how much money will be paid, but also answer a more important question: in what capacity the money will be paid. Even a small change in the way payment conditions are designed can lead to completely different consequences in terms of taxes, deduction obligations and declaration records of the parties.
When a dispute starts from an accounting number
If the tax decides how the Earn-out will be taxed, the accountant decides how much the Earn-out will be charged. This is why most of the world's earn-out disputes do not start with the interpretation of contract terms, but with financial spreadsheets.
A business can achieve revenue as expected but still fail to meet EBITDA targets just because the buyer changes the method of allocating group management costs. A restructuring expense recorded in the first year after a transaction can also significantly reduce profits, resulting in almost zero seller earnings. Similarly, changes in depreciation policies, revenue recognition, or allocation of research and development expenses can all change the results of the Earn-out calculation without reflecting the actual change in the business performance of the enterprise.
Therefore, in international M&A practice, earn-out contracts rarely stipulate only one formula for calculating EBITDA or profit. Accompanying that formula is usually a dozens-page accounting appendix detailing the principles of revenue recognition, handling irregular items, allocating corporate expenses, dealing with related parties, working capital adjustments, and many other technical situations. In fact, the value of Earn-out often does not lie in the calculation formula but in the accompanying accounting rules themselves.
This is also a point that Vietnam lacks. Unlike IFRS 3, Vietnam's accounting standards system currently does not have specific regulations on contingent consideration in business combination transactions. Earn-outs must therefore be handled based on common accounting principles, while many of the financial indicators used by the parties are built according to international practices. The difference between these two accounting systems may result in the same business but the Earn-out result is calculated in two completely different ways.
These decisions can be made for the purpose of optimizing the group's overall business, but at the same time they can also significantly alter the financial indicators used to calculate earn-outs.
Post-Closing: The Biggest Risk of Earn-out
A special feature of earn-out is that ownership of the business is usually transferred to the buyer from the date of completion of the transaction, while the seller's right to enjoy the remaining purchase price depends on future business results. This creates a paradox that ordinary capital transfers almost do not encounter: the person who decides the outcome of the Earn-out is no longer the beneficiary of the Earn-out.
After taking control, the buyer can change the business strategy, organizational structure, pricing policy, investment plan, or resource allocation method between the target enterprise and other companies in the same group. These decisions can be made for the purpose of optimizing the group's overall business, but at the same time they can also significantly alter the financial indicators used to calculate earn-outs.
For example, transferring some business contracts to an associated company, increasing the cost of managing the group, changing the revenue recognition policy, or implementing a major investment program immediately after the completion of the transaction can cause the EBITDA or profit of the business to fall below the threshold of Earn-out activation. although the group's overall economic value is still increasing.
Therefore, in international M&A practice, earn-out contracts often not only stipulate the calculation formula but also set aside many provisions to limit the buyer's right to intervene in the operation of the target business during the earn-out calculation period. Commitments such as "operate in the ordinary course of business", "consistent accounting policies", or "no action primarily intended to reduce Earn-out" have become near-standard terms in many international transactions.
For Vietnam, although the law does not prohibit the parties from establishing these obligations, the practice of drafting contracts still does not consider this as an important content. That makes many Earn-out disputes, if they arise, will not stem from miscalculation but from the question of whether the buyer has the right to change the way the business operates after becoming the owner.
When a dispute is no longer a legal dispute
A notable point of Earn-out is that most of the disputes arising in the world are not resolved like a normal contractual dispute. Instead of debating whether the clause is valid, the parties often debate how to determine revenue, EBITDA, profit, or business value according to agreed accounting principles.
That is why in many countries, earn-out contracts often stipulate a multi-tiered dispute resolution mechanism. Disputes over accounting figures will first be referred to an independent auditor or financial expert for determination. Only when the dispute involves the interpretation of a contract or a breach of a party's obligations can it be brought to arbitration or in court.
The separation of these two types of disputes significantly reduces the time and cost of resolution, and ensures that matters of accounting expertise are handled by people with the right expertise.
Meanwhile, the current practice of M&A contracts in Vietnam still mainly chooses the arbitration mechanism or the court for all disputes that arise. If Earn-out is applied without an independent mechanism for determining figures, the arbitrator or judge will have to deal with very complex accounting issues simultaneously, significantly increasing the cost and time of resolving disputes.
Earn-out is more than just payment terms
A fairly common notion is that earn-out is merely dividing the purchase price into multiple payments. However, in reality, this is a complex legal structure that combines many different mechanisms simultaneously.
A fully designed Earn-out clause usually includes at least such things as the method of determining financial targets; applicable accounting principles; the right to access information of the seller; the obligation to maintain business activities of the buyer; independent audit mechanism; dispute settlement methods; time of payment; to ensure the fulfillment of payment obligations; as well as cases of adjusting or terminating Earn-out ahead of time.
In other words, Earn-out is not a single clause but a "contract within a contract". The value of this mechanism does not lie in how much more money the parties agree to pay, but in the ability to anticipate and rationally allocate the risks that may arise during the time after the transaction has been completed. That is also the reason why in many international deals, the section on Earn-out can be dozens of pages long, accompanied by many detailed financial and accounting appendices. Compared to determining the purchase price, building an earn-out operation mechanism is often the most time-consuming part of the negotiation.
Earn-outs reflect a significant shift in the modern M&A market. As business value increasingly lies in data, technology, and future growth rather than tangible assets, the gap between sellers' expectations and buyers' caution will widen. Earn-out is therefore no longer an exception and is likely to become a popular structure in M&A transactions in Vietnam.
Lawyer Nguyen Van Phuc
HM&P Law Firm
