Buyer and seller are Rs 200 crore apart on a textile business. Value the proposed earn-out bridge to each side and say what could go wrong with the metric.

At the buyer's 40% the package is worth about Rs 784 crore; to a seller confident in its plan it is worth about Rs 879 crore. The two sides agree on the multiple, about 7.4x to 7.5x, and disagree on EBITDA, which is exactly the gap an earn-out bridges: the extra Rs 200 crore is paid only in the world where the business is worth more. The risk sits in the metric, because the buyer controls EBITDA after closing.

Divide each price by the EBITDA each side believes in. The buyer's Rs 700 crore is 7.4x today's Rs 95 crore. The seller's Rs 900 crore is 7.5x the Rs 120 crore its plan promises. They agree on the multiple almost exactly; they disagree on whether the EBITDA will arrive. That is the one kind of gap an earn-outPart of the price paid later, only if the business hits an agreed target after the sale. can close. It is like selling a car to a friend who doubts the mileage claim: you agree a lower price now and a top-up if the car passes the inspection.

Value the earn-out as a payment that may or may not arrive. Discounted for two years at 12%, Rs 200 crore is worth Rs 159.4 crore today. To the buyer, at a 40% chance, it is worth Rs 63.8 crore, so the package costs about Rs 784 crore in expectation. To a seller who believes its plan, the package is worth Rs 879 crore, 98% of its Rs 900 crore ask. Each side can tell its board it got close to its number, which is why earn-outs get deals signed.

Check each outcome separately, because the average hides the logic. If EBITDA misses, the buyer has paid Rs 720 crore for a Rs 700 crore business: a Rs 20 crore concession. If EBITDA hits Rs 120 crore, the buyer pays Rs 200 crore more for Rs 25 crore more EBITDA, worth about Rs 184 crore at its own 7.4x. In present value that is Rs 159 crore paid for about Rs 147 crore of value, close to fair. The earn-out pays out only when the buyer has the better business, so the real price of the bridge is the Rs 20 crore upfront and a small overpayment in the good case.

Almost everything, because the seller no longer runs the business that is being measured. The buyer controls EBITDA after closing, so the seller's payment depends on decisions it cannot make. The buyer can load group overheads onto Tantu, book integration costs inside it, or move a large customer to another subsidiary. The seller, if it stays on as management, can cut maintenance and marketing in year 2 to hit the number. And an all-or-nothing test at Rs 120 crore means Rs 119 crore pays nothing, which invites a fight over every accounting entry.

So write it tightly: define EBITDA in the purchase agreement with named accounting policies and a list of excluded charges, use a sliding scale that pays from, say, Rs 105 crore up to the full amount at Rs 120 crore, give the seller information rights and a dispute route through an independent accountant, and cap what the buyer may allocate from the group. A well written earn-out is mostly definitions.