Earn-outs: Maximising Value in India’s Tech M&A

India’s Information Technology (IT) sector powers a dynamic Tech M&A landscape, with earn-outs emerging as a vital tool in deal structures. As senior leaders navigate this vibrant market, earn-outs bridge valuation gaps, align buyer-seller interests, and de-risk transactions. This article explores the role of earn-outs in India’s Tech M&A, their mechanics, challenges, and strategic considerations for decision-makers.

India’s Booming Tech M&A and the Rise of Earn-outs

India’s Tech M&A market thrives, with over 250 deals in 2024, driven by startup acquisitions, global buyer interest, and private equity activity. Deal structures often blend cash, equity, and earn-outs, especially for high-growth SaaS, fintech, and deeptech firms. address valuation complexities by tying payments to performance incentives, ensuring alignment and minimising upfront risks.

Earn-outs excel in product/IP acquisitions, where buyers secure innovative technologies, and acquihires, where talent retention is critical. Cross-border deals, particularly with US and European firms, leverage Deferred Consideratio to manage market uncertainties. By linking payments to milestones like revenue or customer growth,Deferred Consideratio foster collaboration and drive post-deal success.

1. Recent Developments in Earn-outs

As of June 2025, Deferred Consideration gain prominence amid valuation corrections post the 2021 startup boom and global economic headwinds, such as rising interest rates. Buyers use earn-outs to avoid overpaying for potential, tying payments to verifiable outcomes. Indian SaaS exits, for example, often feature multi-year Deferred Consideration linked to annual recurring revenue (ARR) targets.

Regulatory clarity from the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) enhances earn-out adoption in cross-border M&A. Updated guidelines streamline deferred consideration, reducing compliance risks and boosting confidence. These trends solidify Deferred Consideration as a cornerstone of Tech M&A deal structures.

2. How Earn-outs Work: Key Mechanics

Earn-outs combine upfront payments with deferred considerations tied to milestones. Performance metrics include revenue, EBITDA, customer retention, or IP integration. Timelines typically span 1–3 years, aligning with integration cycles. For example, a SaaS acquisition might tie Deferred Consideration to achieving $10 million in ARR within 24 months.

Legal nuances are critical. Deal structure documents define dispute resolution, measurement protocols, and escrow arrangements to secure payments. Clawback provisions protect buyers if targets falter. Clear definitions prevent disputes, ensuring Deferred Consideratio align with performance incentives.

3. Challenges and Risks of Earn-outs

Earn-outs carry risks despite their benefits. Misaligned incentives can strain buyer-seller relations, especially if buyers prioritise short-term gains. Cultural integration challenges in cross-border deals may hinder performance metrics, kindising earn-out payouts. Accounting complexities, such as valuing contingent payments, demand rigorous modeling. Disputes over earn-out calculations often arise without clear metrics or robust governance.

4. Strategic Considerations for Earn-outs

Buyers use earn-outs to protect valuation, but must establish clear governance and performance incentives. Providing resources and autonomy ensures acquired teams meet milestones. Sellers should negotiate achievable targets and secure measurement rights to prevent manipulation. Legal teams draft precise deal structure documents, while finance teams model scenarios to value Deferred Consideration accurately, ensuring fair deal economics.

Illustrative Example: A Deeptech Earn-out Success

In 2024, a US cloud platform acquired an Indian deeptech startup with a deal structure of 40% upfront and 60% earn-out tied to product integration and $5 million in new customer revenue over 24 months. Clear KPIs and an independent audit mechanism minimised disputes. The startup met its targets, securing a successful payout and seamless integration, showcasing Deferred Consideration as a powerful tool in Tech M&A.

Conclusion: Earn-outs as a Strategic Lever

Deferred Consideration remain a cornerstone of India’s Tech M&A deal structures, balancing risk and reward. By aligning performance incentives and bridging valuation gaps, Deferred Consideration enable smoother transactions in a competitive market. With strategic planning, clear metrics, and robust legal frameworks, leaders can leverage Deferred Consideration to drive value, foster innovation, and ensure success in India’s thriving IT sector, with firms like LawCrust guiding seamless execution.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

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