Legal Framework of “Earn-out” and “Locked Box” in M&A Transactions: Comparative Analysis, Advantages and Disadvantages, Dispute Risks

7 July, 2025 | TNTP LAW | Legal newsletter

In mergers and acquisitions (M&A) transactions, determining the purchase price is not merely a matter of commercial negotiation but also presents significant legal and technical challenges, particularly where the value of the target company is substantially affected by its post-signing performance. To bridge the information and expectation gap between the parties, two prevalent pricing models have emerged in international and Vietnamese practice: the Earn-out and the Locked Box mechanisms. This article presents a comparative legal analysis of the two pricing mechanisms, highlighting their structural characteristics, legal benefits and risks, as well as offering practical guidance for businesses and investors in selecting and implementing the appropriate model.

1.Legal Concepts and Operational Structures

Earn-out

An “Earn-out” is a pricing mechanism whereby a portion of the purchase price is paid upfront at the time of transfer, while the remaining balance is contingent upon the target company achieving agreed financial performance metrics post-transaction. Common indicators include revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), or profitability ratios.

Example: The buyer agrees to pay 70% of the purchase price upfront and withhold the remaining 30%, which will only be paid if post-merger revenue reaches at least VND 100 billion within 12 months.

This structure allows the seller to benefit from the upside potential if the business performs well, while the buyer mitigates downside risk should the performance fall short of expectations.

Locked Box

The “Locked Box” is a fixed-price mechanism whereby the purchase price is determined based on a historical balance sheet prepared as of a specific date (the “Locked Box Date”). The seller undertakes not to extract any economic value from the company between the Locked Box Date and the completion date, except for pre-approved transactions explicitly listed as “permitted leakage”.

Example: The audited financial statements dated 31 December 2023 are used to determine the purchase price. Any dividends, executive bonuses, or related-party transactions not expressly approved are treated as “leakage” and must be reimbursed.

2.Comparative Summary: Earn-out vs. Locked Box

Criteria	Earn-out	Locked Box
Timing of price determination	After closing, based on actual performance	As of the Locked Box Date
Payment structure	Staggered, contingent on financial outcomes	One-off payment, no post-closing adjustments
Post-closing monitoring	Buyer must track performance metrics	No monitoring required, unless leakage occurs
Risk to buyer	Subject to data manipulation or performance opacity	Assumes post-Locked Box business risk
Risk to seller	May not receive full consideration if targets are unmet	Bound to preserve company value, barred from extracting funds

3.Legal Basis and Practice in Vietnam

Both the Earn-out and Locked Box models may be adopted, provided they comply with the applicable laws of Vietnam. However, as there are currently no specific legal guidelines governing these mechanisms under Vietnamese law, businesses and investors should pay particular attention to the following considerations:

The transparency and auditability of financial data;
Alignment between the transaction documents, corporate charter, and internal financial reporting systems;
Tax declaration obligations and post-transaction cash flow recognition in accordance with tax and accounting regulations.

4.Legal Risks and Common Disputes

Risks under Earn-out
Sellers may claim buyers manipulated operations (e.g., deferring sales, inflating expenses) to avoid paying the deferred amount.
Poorly defined performance metrics may trigger disputes over calculation methods.
Absence of third-party audit or neutral verification mechanisms often leads to prolonged disagreements.
Risks under Locked Box
Undetected related-party transactions or unauthorized distributions may result in unaccounted leakage.
Buyers may face challenges monitoring cash flow movements between the Locked Box Date and closing.
Ambiguity in defining “permitted leakage” often leads to disputes regarding reimbursement obligations.

5.Recommendations for Enterprises and Investors

Earn-out structures should be reserved for transactions involving growth-stage companies with high upside potential but uncertain valuation. Operational oversight during the Earn-out period is essential.
Locked Box structures should be based on independently audited financial statements. All permitted leakage items must be enumerated in the Share Purchase Agreement (SPA).
Pricing adjustment provisions must be drafted with legal precision and accompanied by a clearly defined dispute resolution mechanism.
Consider escrow or holdback arrangements to secure post-closing obligations.

Earn-out and Locked Box represent two distinct yet valuable mechanisms for managing pricing risk and bridging valuation gaps in M&A transactions. While both aim to address information asymmetries and protect party expectations, their suitability depends on the specific context of the deal and the nature of the target business. A well-informed selection, reinforced by transparent contractual provisions and expert legal-financial advisory support, is critical to ensuring transactional success, stability, and minimizing future disputes.

This article, titled “Legal Framework of “Earn-out” and “Locked Box” in M&A Transactions: Comparative Analysis, Advantages and Disadvantages, Dispute Risks”, is provided by TNTP. For further inquiries, please contact our team for timely assistance.

Sincerely,

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