Your earn-out settles on the manufacturer's numbers

The number has arrived, the letter of intent is on the table, and the figure at the top is the one you were hoping for. Then you read the line underneath. Part of it is paid at signing. Another part is paid in two or three years, if the business hits certain results.

That second part is the earn-out, and it is the most common way of reconciling two numbers that do not meet: what the seller asks and what the buyer is willing to pay today. On paper it is a fair compromise. The seller believes in the company's future; the buyer pays for that future only if it arrives.

A dealership has a problem that is smaller in most other sectors. The profit that future is measured on is decided neither by the seller nor by the buyer. A large part of it is moved by the manufacturer. This piece is about what that means, and how to write an earn-out you will actually collect.

The price in the letter of intent is not the price you collect

Between the figure at the top of the letter of intent and the money that reaches your account there are usually three steps, and each of them can take something away.

The first is due diligence, which we covered when writing about the first number: every finding becomes a reason to revisit the price. The second is the adjustment at closing. The price is set on an assumed level of debt, cash and working capital, and if those are different on the day of completion, the price moves. The third is the earn-out, the part that depends on what the business does after the sale.

This is not a rare case. CMS's European M&A Study, now in its 18th edition, looks at the 601 deals the firm advised on in Europe in 2025. Of those, 27% carried an earn-out, equal to the highest figure since the study began, against an average of 23% over the previous ten years. In 55% of those cases the earn-out was measured on EBIT or EBITDA, up from 47% in 2024. And in Southern Europe, which for CMS means Italy, Spain and Portugal, the share of deals with an earn-out doubled in a year, from 17% to 35%. Nearly half of all deals, 48%, also had a price adjustment at closing.

The sample is one law firm's deals, not the whole market, and none of them is labelled automotive. But the direction is clear, and clearer in Italy than elsewhere: a growing part of the price is paid later, and paid on profit. Most of those earn-outs, 58%, run between one and three years.

For a seller the practical consequence is simple. The figure to compare with your alternatives is not the one at the top of the letter. It is what is left after the three steps, weighted by the odds of collecting it.

In a dealership the earn-out profit is moved by the manufacturer, not by your buyer

In a manufacturing business, an earn-out on EBITDA measures, roughly, how the business performs: how much it sells, at what price, at what cost. The seller can argue with the buyer about how it is being run, but the number is made inside the company.

In a dealership a large part of that number is made outside. A dealer sells cars it does not build, at prices it increasingly does not set, on a margin that is partly fixed and partly a bonus the manufacturer pays if targets the manufacturer sets are met. With agency invoicing and uniform online pricing, which have already taken negotiating room away from the dealer, the share decided elsewhere grows further: the dealer no longer buys the car and resells it, it collects a fee.

So an earn-out on a dealership's profit is, to a large extent, an earn-out on the manufacturer's decisions. Not on how you will work in the years after the sale, and not even on how your buyer will.

Three levers move that number without anyone cheating: targets, tiered bonuses, product allocation

There is no need to imagine a dishonest buyer or a hostile manufacturer. It is enough to look at three ordinary mechanisms of the trade.

Targets. The manufacturer sets them every year, by brand and by site, and changes them when its strategy changes. A year of higher targets in a flat market lowers the dealership's profit without anything changing in the way it works.

Tiered bonuses. Part of the margin is paid only above certain thresholds of volume or quality. This is not an exception: in its 2021 evaluation of the EU rules on car distribution, the European Commission found that around 30 to 40% of manufacturers, across the twelve countries examined, offered bonuses rising in volume steps, in a fact-finding study the Commission itself describes as limited in scope. Below the threshold you do not get part of the bonus: you get none of it. A small move in the threshold, or one bad quarter for market reasons, and a slice of profit disappears at once, in exactly the year the earn-out is measured on.

Product allocation. How many cars arrive, which models, and when. A strong model that arrives late, or in smaller numbers than the market would take, moves volume and therefore profit. The dealership has no say in this, and often neither does the group that bought it.

There is a fourth, inside the buyer's group: how shared costs are spread after integration. Central services, shared staff, recharges between companies. These are legitimate choices for whoever runs a group, and they are also choices that move the profit on which the group's debt to you is calculated.

Beyond that general picture, this is a judgement from the trade, not a statistic: no public source documents how targets, thresholds and allocation move, brand by brand. Anyone who has worked in a dealership will recognise them anyway, because they live through them every year.

If the earn-out includes used cars, you are betting on someone else's prices

One line of profit does not depend on the manufacturer, at least not directly: used cars. It does not depend on you either.

The used-car margin is made on the cars that come back: trade-ins, the end of rental and lease contracts. What those cars are worth is set by the used market, and in recent years that market has taken its biggest shock on electric cars, which resell well below the values they were priced on. A dealership with many electric cars coming back in the two or three years after the sale has a used-car margin that depends on a price nobody at the table controls.

If the earn-out is measured on a profit that includes used cars, part of the price of your company is tied to what cars sold by others, to others' customers, under contracts written by others, will be worth in three years. It may go well. But it is a bet, and it is worth knowing you have placed it.

The closing adjustment is a second negotiation, and you win it by writing the rules first

The earn-out comes later. The closing adjustment comes first, and it is a negotiation many sellers only discover once it has started.

The mechanism is this. The agreed price assumes the business reaches completion with a certain level of debt, cash and working capital. If the figures on the day are different, the price is corrected. There are two ways of doing it. With completion accounts, a balance sheet is drawn up at the completion date and compared with the expected one, and one side pays the difference. With a locked box, an already closed balance sheet is the reference and the company is barred from passing value out between that date and completion: no true-up, but strict rules for the period in between.

In a dealership, working capital is not a technical line. It is the stock of new and used cars, financed on the floor plan, and it moves by millions from one month to the next depending on how many cars have arrived and how many have been delivered. Completing at the end of a quarter or in the middle of one, before or after a wave of deliveries, changes the number. And if the contract does not say how a used car six months in stock is valued, that value will be set by whoever draws up the completion accounts, which is usually the buyer.

The adjustment is won beforehand: by writing into the agreement how stock is valued, what counts as debt (floor plan in or out), what the normal level of working capital is, and who prepares the accounts. Once the price is signed, nobody has an interest in writing any of that in your favour. In our M&A practice this is the negotiation phase: it is where diligence findings turn into money, or fail to.

An earn-out pays only if the seller keeps a lever on the number. Without one, it is a discount in instalments.

An earn-out is not wrong in itself. It is wrong when it is measured on a number the seller cannot influence, the buyer can move, and the manufacturer moves anyway.

The levers you can write into the agreement exist, and none of them is exotic.

Measure it on something the manufacturer moves less. Workshop and parts margin, for example, or the number of active customers, rather than total profit. Or measure it on profit, but neutralise by contract the lines that move outside: targets changed by the manufacturer, bonuses lost on moved thresholds, reduced allocation.

Fix the operating rules for the earn-out period. What the buyer may and may not do: close a site, change a brand, recharge group costs above a ceiling. Without those rules the buyer legitimately runs the business as it sees fit, and the earn-out takes the consequences.

Keep a role. If the seller stays in the business for the earn-out period, in a real role, they keep a lever on the number. If they leave on the day of completion, they have far less of one, and the price should be read accordingly.

Shorten it. An earn-out over one year is measured on a period you can already see. Over three years it is measured on a market nobody knows.

Without any of these levers, the deferred part of the price should be treated for what it is: not a reward for the future, but a discount paid in instalments, collected if things go well for someone else.

When the earn-out is there to make the price add up, the price does not add up

There is one case in which the earn-out is not a tool but a symptom. It is when the two sides are far apart, and the earn-out lets the seller's number appear at the top of the letter while the buyer's number is what gets paid today.

It is easy to spot: the deferred part is large against the total, the targets that trigger it are higher than anything the business has ever done, and the period is long. In that case the buyer is telling you, politely, what your company is worth to them: the part they pay at signing. The rest is the price that lets you say yes.

The honest answer is that the deal is not ready. Either you find a buyer for whom the company is worth more today, or you work on the company until today's number comes closer to the one you want, or you decide that number is acceptable. Accepting an earn-out whose only job is to make the letter add up means signing the buyer's price and hoping to collect yours. Written that way, this deal should not be done.

Sources: CMS, European M&A Study 2026 (18th edition, March 2026), pp. 3, 6, 26-28 and 88, on the 601 deals CMS advised on in Europe in 2025; European Commission, SWD(2021) 112 final, evaluation of the Motor Vehicle Block Exemption Regulation, Annex 2. How targets, thresholds and allocation move brand by brand is an observation from the trade: no public source documents it.