Nelson Advisors: The New World of Earn-Outs in European HealthTech, MedTech and Health AI
Why the earn-out became the default bridge
The earn-out used to be the clause everyone hoped to delete before signing. In European HealthTech, MedTech and Health AI it has quietly become the deal itself. A founder selling a Series B diagnostics company in Munich, a PE-backed buyer consolidating radiology AI across the Nordics, a US strategic picking up a UK remote-monitoring business: in each case, a meaningful slice of the price, often 20 to 50 per cent, now sits behind a set of post-completion conditions.
Three forces pushed it there. First, the valuation gap. Health companies raised at 2021 multiples and are selling into a market that prices them on 2026 revenue and 2026 evidence. Neither side can agree on a number, so they agree on a formula instead. Second, regulatory timing. A company whose value depends on a CE mark under the EU Medical Device Regulation, an AI Act conformity assessment, a NICE recommendation or a German DiGA listing is worth very different amounts depending on whether those arrive.
The buyer will not pay today for a decision a notified body makes in eighteen months. Third, the shape of the assets themselves. Much of what is being bought in Health AI is a model, a dataset, a handful of clinical champions and a pipeline of hospital pilots. None of that is bankable without the people who built it staying long enough to convert it.
So the earn-out has stopped being a tail on the deal and has become its spine. It is where the money is, where the people are tied in, and where most of the post-signing arguments happen.
Our article below walks through how the modern European health earn-out is actually built: the holding structures, the equity roll, the multi-KPI scorecards, the clawbacks, the people terms, and the risks each side is carrying when they sign.
Post-acquisition structures: where the business lives during the earn-out
The single most important question in a health earn-out is not the target number. It is where the acquired company sits inside the buyer for the two or three years the earn-out runs. That decision determines whether the sellers can actually influence the metrics they are being paid on.
The data shows how much is riding on this. Latham & Watkins' most recent European study of more than 300 private deals found earn-outs concentrated most heavily in healthcare and life sciences, even as their use across the market as a whole softened slightly. On the medtech side, the SRS Acquiom life sciences study cited by Foley Hoag found earn-outs in 84 per cent of private medical device deals closing between mid-2023 and mid-2025, up from 59 per cent in the two years before. Across 342 private life sciences deals with an earn-out, roughly $95 billion of contingent consideration was on the table, and only 9.5 per cent of it had been paid at the time of writing. If most earn-outs never pay, the structure around them is where the value is won or lost.
Three models dominate in Europe.
The ring-fenced subsidiary. The target stays a separate legal entity, keeps its own P&L, its own management, its own brand and often its own hospital contracts. The buyer provides capital, distribution and back office but agrees in the SPA to a set of operating covenants: no diversion of customers, no loading of group overheads onto the subsidiary's cost base, no change of accounting policies, a minimum sales headcount, a committed marketing budget. This is the seller-friendly model and the one most founders push for. Its weakness is that it delays the integration that was the point of the deal. A radiology AI business kept in a glass box for three years will hit its revenue number but will not have been plugged into the acquirer's PACS footprint, which is where the real synergy sat.
The integrated business unit with shadow accounts. The target is folded into the buyer's operating structure on day one, but the parties agree a methodology for tracking "earn-out revenue" or "earn-out EBITDA" as if the business were still standalone. This is where the fighting happens. Which group customers count as the target's? How are bundled contracts allocated when the buyer sells its own device alongside the target's software? What transfer price applies when the target's algorithm runs inside the buyer's platform? Good SPAs attach a worked example to the earn-out schedule showing exactly how a bundled sale would be allocated. Bad ones leave it to good faith and a dispute resolution clause.
The staged integration. Increasingly common in Health AI deals, this splits the earn-out period into phases. Year one is ring-fenced with a regulatory or product milestone. Years two and three are integrated with commercial KPIs measured on the combined footprint, usually at a lower sensitivity so that the sellers are not exposed to the buyer's execution. This is the compromise most large strategics now start from, and it works best when the phase boundaries are tied to events (CE marking, first NHS framework award, a notified body decision) rather than to dates.
Whichever model is chosen, the operating covenants matter more than the headline multiple. A seller who negotiates an extra turn of EBITDA but concedes that the buyer may "operate the business in its sole discretion" has negotiated nothing.
Rolling equity into new vehicles
The cash earn-out has a rival, and in private-equity-led health deals the rival is winning. Rather than promising founders a deferred cheque, buyers are asking them to take part of the price as equity in a new holding vehicle: a Luxembourg or Jersey TopCo, a UK Bidco, a Dutch stichting-backed structure, or simply preference and ordinary shares in the platform company doing the buy-and-build.
The pitch to sellers is simple. An earn-out caps your upside at the agreed maximum and leaves you exposed to the buyer's behaviour. A roll gives you a second bite at a bigger business, usually at the same entry price the sponsor paid, and aligns you with the people who now control your destiny. For a founder of a €30 million digital therapeutics business being bolted onto a €400 million platform, rolling 20 to 30 per cent of proceeds into the platform can be worth more than any earn-out, provided the platform exits well.
The pitch to buyers is just as simple. Rollover equity costs no cash, defers tax for the seller in most European jurisdictions where the rules allow a share-for-share exchange, and keeps the founder's net worth tied to the group rather than to a ring-fenced subsidiary. It also softens the integration problem described above: a founder who owns a slice of the whole group has less reason to defend their old silo.
Four features now define a well-built roll in European health deals.
Instrument parity. Sellers should roll into the same class of instrument as the sponsor, pro rata across the loan notes, preference shares and ordinaries in the structure. A roll that lands only in ordinaries, below a thick layer of sponsor preference, is a roll into the riskiest part of the stack dressed up as alignment.
A separate management incentive plan (MIP). The roll is payment for the business sold. The MIP is payment for running it going forward. Mixing the two, so that the rolled equity is subject to leaver provisions, is the most common seller mistake. Rolled equity should be good-leaver-protected or outside the leaver regime entirely; only sweet equity should be at risk if the founder walks.
Liquidity rights. Rollover holders need tag rights on a sponsor exit, a put or drag mechanism if the platform is sold in parts, and a clear answer to what happens if the sponsor refinances or recapitalises before exit. In Health AI, where platform exits can be five years away, a founder who rolled at 35 and has no route to cash at 42 has a problem that no board seat will solve.
Hybrid structures. The newest deals combine a modest cash earn-out tied to near-term regulatory or clinical events with a larger equity roll tied to the platform exit. The earn-out de-risks the specific uncertainty (will the CE mark arrive, will NICE recommend), while the roll captures the strategic upside. Buyers like it because the cash component is small and bounded; sellers like it because they are not betting everything on either leg.
The tax position needs checking in every jurisdiction involved. UK sellers rolling into a non-UK TopCo will want to preserve business asset disposal relief where possible and avoid an inadvertent dry tax charge. German sellers will look closely at the Wegzugsbesteuerung exposure if the vehicle moves. French sellers will want the apport-cession regime to work. None of this is exotic, but it is routinely left until the week before signing, when it is too late to restructure.
Targets built on multiple KPIs
The single-metric earn-out is dying in health deals, and it deserves to. A revenue-only earn-out tells a MedTech founder to sell hardware at any margin in year two. An EBITDA-only earn-out tells a Health AI founder to cut the clinical validation team that the buyer actually acquired the company for. Neither produces the business the buyer thought it was buying.
What has replaced it is the scorecard: a weighted basket of four to six KPIs, each with its own threshold, target and stretch level, paying out on a sliding scale rather than a cliff. A typical European Health AI earn-out in 2026 might look like this.
KPI | Weight | What it measures | Typical evidence |
Recurring revenue | 35% | ARR from signed, live contracts at the measurement date | Audited accounts, contract register |
Regulatory milestone | 20% | CE mark under MDR for the next indication, or AI Act high-risk conformity | Notified body certificate |
Clinical or real-world evidence | 15% | Peer-reviewed publication, registry data, or HTA submission accepted | Journal acceptance, NICE/G-BA correspondence |
Deployment footprint | 15% | Number of hospital sites live, or patients on the platform | Buyer's deployment logs, jointly verified |
Integration milestone | 10% | Product running inside the buyer's platform, or data migrated | Joint sign-off |
Team retention | 5% | Named clinical and engineering leads still employed | HR records |
Several design rules have emerged from the deals that have gone well and, more instructively, from the ones that ended in arbitration.
Pay on a curve, not a cliff. A binary target creates a binary incentive: once it is clearly out of reach, the founder stops trying; once it is clearly in hand, they stop too. Linear or stepped payouts between a floor (typically 70 to 80 per cent of target) and a cap (120 to 150 per cent) keep everyone engaged across the whole range.
Define the KPI to the decimal. "Revenue" is not a definition. Recognised under which GAAP, from which entities, net of which rebates, excluding which intra-group sales, measured at which exchange rate, with which treatment of multi-year contracts signed in the last month of the period? The same applies to clinical metrics. "Positive trial result" means nothing; "primary endpoint met at p<0.05 in the pre-registered analysis" means something.
Make non-financial milestones objective and externally verified. Regulatory and clinical KPIs are the best kind of earn-out metric precisely because a notified body, a journal or an HTA body decides them, not the buyer. The seller cannot game them and the buyer cannot manipulate them. Where the buyer does control the input, for instance deployment footprint depends on the buyer's sales force, the SPA should carry a minimum-effort covenant or a deemed-achievement clause if the buyer fails to resource it.
Watch the interaction between KPIs. A data KPI (patients on the platform) can be met by giving the product away, which destroys the revenue KPI. A regulatory KPI can be accelerated by narrowing the intended use, which hurts the commercial one. Scorecards need a short narrative in the schedule explaining the intent of each metric so that a tribunal can interpret the weighting the way the parties meant it.
Catch-up and carry-forward. If year one is missed and year two is smashed, does the seller recover the year-one payment? Most sellers now ask for a cumulative measurement or at least a one-period carry-forward. Buyers resist, but the alternative is a founder who checks out in month fourteen.
The scorecard is more work to negotiate than a single number. It is also far harder to dispute, because it forces the parties to write down what they actually want the business to become.
Clawbacks: when the earn-out runs backwards
The traditional earn-out only ever moved in one direction. The seller got the base price at completion and, if things went well, more later. The new generation of health deals increasingly adds a reverse gear: mechanisms that allow the buyer to recover money already paid if the performance that triggered it turns out to be hollow.
The reasons are specific to the sector. In MedTech and Health AI, early metrics can flatter. A revenue number can be met with pilot contracts that never convert. A deployment number can be met with sites that go live and then switch the product off. A regulatory milestone can be achieved and then undermined by a post-market surveillance finding, a field safety notice or a withdrawn indication. Buyers who have paid out on a year-one milestone and then watched the underlying asset deteriorate have, understandably, started asking for protection.
Five clawback structures have become common.
Cumulative true-up. The simplest form. Earn-out payments made for year one are provisional and are recalculated at the end of the full earn-out period against cumulative performance. If year one was strong and years two and three collapsed, the final payment is reduced or, in aggressive drafts, the seller repays part of the earlier instalment. Sellers usually succeed in limiting this to a set-off against future payments rather than a cash repayment.
Churn and durability tests. A revenue-based payment is subject to a look-back: if more than a defined percentage of the contracts that generated the earn-out revenue are terminated or non-renewed within 12 to 18 months, a proportion of the payment is clawed back. This is now standard where the target's revenue is hospital SaaS with short initial terms. The definition of "terminated" needs care; a contract the buyer deliberately chose not to renew should not count.
Regulatory reversal. Payment on a CE mark or an AI Act conformity assessment is made at the time of certification but is subject to recovery if the certificate is suspended or withdrawn within a defined window for reasons attributable to the pre-completion technical file. Sellers should insist on the causation link: a withdrawal caused by the buyer's post-completion changes to the device or model is not the seller's problem.
Escrow and holdback. Rather than a true clawback, part of each earn-out payment is retained in escrow for 12 months and released only if no durability trigger has fired. This is cleaner for both sides because nobody has to chase a founder for cash they have already spent on a house. The cost is that the seller's money is tied up longer.
Set-off against rollover equity. In hybrid deals, the clawback is satisfied by cancelling or diluting rolled shares rather than demanding cash. This is elegant on paper and brutal in practice, because the founder loses upside at exactly the moment the business is struggling. It should be resisted or heavily capped.
From the seller's side, three protections matter most. First, a cap: clawbacks should never exceed the earn-out payments actually received, and ideally a fraction of them. Second, a time limit: a durability look-back of 12 months is reasonable, one of 36 is a disguised extension of the earn-out. Third, a carve-out for buyer conduct: no clawback where the deterioration was caused by the buyer's decisions, under-resourcing, price changes or integration failures.
Without the third, a buyer can trigger its own clawback by starving the business.
The practical consequence of all this is that founders are no longer safe when the earn-out cheque arrives. They are safe when the look-back window closes. That changes how they should think about spending, tax planning and when to actually leave.
Key people: the founder is the earn-out
In most sectors the earn-out is about the business. In Health AI and much of MedTech it is about six people. The chief medical officer who has the relationships with the clinical champions at the twelve reference hospitals. The ML lead who understands why the model drifts on a particular scanner. The regulatory head who wrote the technical file and knows which notified body reviewer to call. The founder who can still get a meeting with a hospital CIO. Lose two of them in month six and the KPIs on the scorecard are fiction.
Buyers know this, which is why the people terms have become as heavily negotiated as the price. Four mechanisms are in play.
Named key-person conditions. The earn-out schedule identifies a list of individuals, and the payout is reduced if a defined number of them leave before the measurement date other than as good leavers. Sellers should keep the list short, insist that death, disability, redundancy and constructive dismissal are good-leaver events, and resist any formulation that makes the founder's own departure a trigger unless they genuinely intend to stay.
Good leaver, bad leaver, and the grey zone. The leaver regime borrowed from private equity now runs through earn-outs too. A bad leaver (resignation without cause, dismissal for cause, breach of restrictive covenants) typically forfeits unvested earn-out and, in roll structures, sells back sweet equity at the lower of cost and fair value. A good leaver keeps earn-out entitlement pro rata. The grey zone is the founder who is pushed out by a buyer who has decided they do not fit the culture. The SPA should say explicitly that a termination by the buyer without cause is a good-leaver event and that the earn-out is deemed achieved at target, or at least that it continues to be measured and paid as if they had stayed. Without this, the buyer has a cheap exit from the whole contingent payment.
Retention pools separate from the earn-out. Sophisticated buyers now fund a retention pool for the non-shareholder key people, paid in cash or buyer equity on time-based vesting, kept entirely separate from the sellers' earn-out. This avoids the awkward dynamic where the founder is asking engineers to stay for an earn-out that pays the founder. It also protects the buyer: if the founder leaves, the team's incentive survives.
Role, reporting line and authority. The founder's employment agreement should specify their title, who they report to, what decisions they can take without group approval and what budget they control. An earn-out founder who reports to a regional general manager with no interest in the earn-out, and who cannot hire a salesperson without three signatures, has no way to influence the outcome.
There is a harder truth underneath all of this. The founder who sells a health company and stays for a three-year earn-out is signing up to be an employee in someone else's organisation, measured against metrics they half-control, while watching a buyer reshape the thing they built. Many find it intolerable by month eighteen. The best deals acknowledge this by front-loading the earn-out, making year one the heaviest payment and the most within the founder's control, and by allowing a negotiated early exit at a discounted value rather than forcing a bad-leaver outcome. A founder who can leave with dignity and a cheque at month eighteen is more useful to the buyer than one who stays resentfully until month thirty-six.
Risks and rewards on both sides of the table
The earn-out is sold as a way of sharing risk. In practice it reallocates risk in ways neither party fully appreciates at signing. It is worth being blunt about where each side is exposed.
Seller's upside | Seller's exposure | Buyer's upside | Buyer's exposure | |
Headline price | Bridges the gap; a higher total than a clean cash deal | Only 9.5% of life sciences earn-out potential has actually been paid | Pays the full price only if the thesis proves out | Overpays if the metrics are gamed |
Control | Operating covenants keep the business recognisable | Buyer runs the group; covenants are hard to police | Integrates on its own timetable | Covenants delay synergies and can trigger deemed-achievement claims |
Regulatory and clinical | Objective milestones nobody can manipulate | Delays at notified bodies or HTA bodies are outside anyone's control | Pays only when the asset is de-risked | Milestone met, then reversed, with cash already out the door |
People | Retention pools and MIPs for the team | Three years as an employee; leaver provisions bite | Keeps the team through the hard part | Founder checks out; culture clash |
Disputes | Expert determination can be fast | Legal cost and distraction against a larger balance sheet | Set-off against unpaid earn-out as leverage | Reputational damage with the next founder it wants to buy |
Seller risks that are underpriced. The buyer's credit risk is almost never discussed, yet an earn-out is an unsecured promise to pay from a company whose fortunes may change. Sellers of a business to a PE-backed platform are owed money by a leveraged vehicle; if the platform refinances badly or breaches covenants, the earn-out ranks behind the lenders. Parental guarantees, escrow of a portion of the maximum, and a right to accelerate on a change of control of the buyer are the standard answers and are regularly conceded if asked for early. Also underpriced: the cost of monitoring. Policing an integrated earn-out requires management accounts, access rights and often a forensic accountant. Sellers should negotiate information rights and an audit right at the buyer's expense if a discrepancy above a threshold is found.
Buyer risks that are underpriced. The clearest is the perverse incentive: every metric the buyer puts on the scorecard becomes the thing the seller optimises, at the expense of everything else. The second is the integration tax. A ring-fenced earn-out business cannot be fully integrated, so the synergies that justified the price are deferred by two to three years, by which time the market may have moved. The third is the dispute itself. Earn-out disputes in health deals are costly, slow and public enough that the next founder the buyer approaches will have heard about it. Several European strategics now have a reputation among advisers as "earn-out litigators", and it costs them deals.
Where disputes actually arise. Overwhelmingly, three places. The accounting definitions, especially revenue recognition on multi-year hospital contracts and the allocation of bundled sales. The operating covenants, where the seller alleges the buyer starved, redirected or re-prioritised the business and the buyer alleges ordinary commercial judgment. And the leaver provisions, where the characterisation of a departure determines whether millions are paid. The common factor is that each is a question of interpretation rather than fact, which is why an expert determination clause (an independent accountant for the numbers, an industry expert for the covenants) with a short timetable is worth more than any amount of careful drafting.
The rewards, when it works. A well-constructed earn-out in a European health deal does something a clean cash sale cannot. It lets a buyer acquire a company whose value is still forming (a CE mark away, a trial read-out away, an NHS framework away) at a price that is fair to both sides whichever way the uncertainty resolves. It keeps the people who carry the value in the building through the period when they matter most. And it gives the seller a route to a price they could never have achieved on day one. The 9.5 per cent payout figure is grim, but it masks the deals where founders received two or three times their upfront consideration because the structure was built around milestones they could actually deliver.
What a well-built earn-out looks like in 2026
Pull the threads together and a pattern emerges. The European health earn-out that works in 2026 is not a single clause but a system, and its parts have to be designed together.
It starts with structure: a staged integration, ring-fenced for the first regulatory or clinical milestone and integrated thereafter, with operating covenants that are specific enough to enforce and short enough to live with. It pays on a weighted scorecard of four to six KPIs, with the heaviest weights on metrics an external body decides and the lightest on metrics the buyer controls, on a curve rather than a cliff, with a carry-forward so a bad year does not end the founder's engagement. It combines a bounded cash earn-out for the near-term uncertainty with an equity roll, in the sponsor's instruments and outside the leaver regime, for the long-term upside. It protects the buyer with a time-limited durability look-back, capped at payments received and carved out for the buyer's own conduct, and protects the seller with a parent guarantee, escrow and information rights. It treats the key people as what they are, the actual asset, with named-person protections, a separate retention pool, clear authority for the founder and a dignified early exit. And it sends every dispute to an expert with a ninety-day clock rather than to a court with a three-year one.
None of this is cheap to negotiate. A scorecard earn-out with rollover and clawback can add six weeks and a meaningful legal bill to a mid-market deal. But the alternative is not a simpler deal; it is a deal that does not happen, or one that happens and then spends its third year in arbitration. For founders, the lesson is to spend as much time on the earn-out schedule as on the headline price, because the schedule is where the price actually lives. For buyers, it is that the earn-out is a tool for buying a business, not a tool for not paying for one, and founders talk to each other.
The market will keep moving. AI Act conformity assessments will become a standard milestone as the high-risk obligations bite. HTA harmonisation under the EU Joint Clinical Assessment regime will create new, objective European-level triggers. More deals will be hybrids of cash and roll. But the underlying logic will hold: in a sector where value is created by a small number of people over a short number of years, in the shadow of decisions made by regulators and payers, the earn-out is how the two sides agree to find out together what the company is worth.
Sources
Latham & Watkins, Private M&A Market Study, 12th Edition (October 2025): earn-outs most common in healthcare and life sciences across 300+ European private deals, July 2023 to June 2025.
Foley Hoag, The Rise of Contingent Value: CVRs and Earnouts Reshape Life Sciences M&A (June 2026): citing the 2025 SRS Acquiom Life Sciences M&A Study on 84% medical device earn-out prevalence, ~$95bn aggregate potential and 9.5% paid.
Market-practice observations on structures, weightings, clawback periods and leaver terms reflect general deal experience rather than a published dataset; percentages given for weightings and payout ranges are illustrative.
Nelson Advisors > European Healthcare Technology Investment Banking
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