Earn-outs in Brazilian M&A: balancing price, risk, and post-closing control

In M&A transactions, buyers and sellers may agree on the strategic merits of the deal and still disagree on one critical point: valuation. This is particularly common when part of the target’s value depends on future performance. For international investors acquiring Brazilian businesses, an earn-out can bridge that gap by making part of the purchase price contingent on agreed financial or operational targets.

The seller has in-depth knowledge of the business and its track record and may therefore view the company’s potential differently from the buyer. The buyer, in turn, may be unwilling to pay in advance for something that may or may not happen.

The earn-out clause serves to bridge this gap. Under this arrangement, a portion of the acquisition price is contingent upon the occurrence of certain events or the achievement of future targets agreed upon in advance. In general, these targets relate to the target company’s financial or operational performance.

This mechanism, however, does not eliminate valuation risk. It reallocates that risk over time. A buyer can avoid paying upfront for performance that may not materialize, while the seller preserves the opportunity to receive additional consideration if the business performs as expected.

Under Brazilian law, this structure is supported by the Civil Code rules on conditions and by Article 487, which allows the price to be determined by objective indices or parameters. The legal framework, however, is only the starting point. In practice, the effectiveness of an earn-out depends largely on how precisely the parties define the calculation mechanics and post-closing governance.

Post-closing management is usually the main source of tension. Once the transaction closes, the buyer controls decisions that may directly affect the earn-out. Investments, hiring, reorganizations, related-party transactions, integration costs or changes in accounting policies may reduce short-term results even when commercially justified. The agreement therefore needs to distinguish legitimate business decisions from conduct that improperly interferes with the seller’s contingent consideration.

Article 129 of the Brazilian Civil Code is particularly relevant: if a party maliciously prevents a condition from being fulfilled, the condition may be deemed fulfilled. This does not prevent the buyer from managing the acquired business or pursuing long-term strategies. It does, however, reinforce the importance of contractual safeguards against artificial interference with the agreed metrics.

For foreign investors, the key drafting questions are practical: Which metrics will determine payment? Which accounting principles will apply? How will extraordinary items, group allocations and reorganizations be treated? What information will the seller receive? Which decisions remain within the buyer’s sole discretion? Who will resolve disagreements over the calculation?

The goal should not be to freeze the target company’s operations during the earn-out period. Instead, a well-structured earn-out should identify the decisions that may distort the agreed metrics and determine in advance how the effects of those decisions will be treated. In some transactions, restrictions on specific actions may be appropriate; in others, it may be more efficient simply to neutralize their impact for calculation purposes.

Earn-outs can facilitate transactions in which valuation uncertainty would otherwise prevent agreement. But if the parties do not clearly define the economic assumptions, calculation rules, information rights and post-closing management boundaries, a mechanism intended to solve a pricing gap may merely postpone the dispute.