Earn-outs are increasingly common in Bulgarian mid-market transactions, yet Bulgarian law provides little guidance on their enforceability or the resolution of earn-out disputes. This article offers insight on these topics.
An earn-out is a mechanism providing for contingent additional consideration based on a target’s post-closing performance. In acquisitions of Bulgarian companies across various sectors (but perhaps most notably in the technology sector) by foreign investors over the past 5 – 7 years, earn-out provisions have become a common feature of deal structures, particularly where founder management is retained post-closing. Sellers accept a lower upfront payment in exchange for the prospect of additional consideration linked to post-closing performance. Buyers use earn-outs to bridge valuation gaps, align short/mid-term incentives post-closing, and manage risk in founder-led businesses where the seller’s ongoing involvement is operationally critical.
According to an SRS Acquiom report (2026 M&A Deal Terms Study[1]), globally, the use of earn-outs outside the life sciences sector (which is typically characterized by a large percentage of earn-outs in M&A) rose from 15% of private M&A transactions in 2019 to a peak of 33% in 2023, before settling to approximately 22-24% in 2024 and 2025. The median earn-out size for 2025 runs to approximately 34% of closing payments, with a median performance period of 21 months post-closing. In Bulgaria, we have seen earn-outs following similar trend, driven by the same forces: post-pandemic uncertainty, valuation gaps between founders/sellers and institutional buyers, and the need to retain key management through an integration period.
1. Legal Framework: What Kind of Obligation Is an Earn-Out?
Under Bulgarian law, earn-out provisions are best characterised as contingent deferred payment obligations under the Contracts and Obligations Act (COA), specifically, obligations subject to a condition (the achievement of the earn-out metric) and a term (the earn-out period). As such, they are enforceable in principle under the general contract law without requiring any special corporate authorisation beyond their explicit inclusion in the Share Purchase Agreement (SPA) itself.
Earn-out provisions in Bulgarian M&A transactions are typically structured as monetary obligations of the buyer under the SPA, payable to the seller. They are not equity instruments or participation rights in the company. This is an important distinction as it means that they are fully transferable and assignable by the seller unless the SPA expressly restricts assignment – a drafting point that can create complications where the selling shareholder is a holding vehicle that is itself subsequently restructured.
Where earn-out payments are instead structured as management bonuses payable by the target company to retained management, they cease to be purely contractual SPA obligations and instead become employment or management service obligations subject to Bulgarian labour and/or social security law. This structuring choice has significant consequences for how the earn-out mechanics must be designed and documented (see below).
2. Accounting Angle
The most significant practical problem with earn-out provisions in Bulgarian transactions is the accounting baseline. Many Bulgarian target companies maintain their accounts under the Bulgarian National Accounting Standards (BAS). An earn-out calculated by reference to ‘EBITDA’ or ‘revenue’ (as the two most commonly used earn-out metrics) without a defined accounting basis will be measured against the accounting policies the target company historically applied under BAS. If the buyer introduces IFRS accounting post-closing (which is common where a Bulgarian acquisition is being integrated into an international group), the historical earn-out metric measured under BAS may become incomparable to the post-closing results under IFRS. These potential issues need to be addressed explicitly in the earn-out mechanism, alongside any additional adjustments and formulas that parties would typically seek to include.
3. Post-Closing Conduct Obligations and Manipulation Risk
In transactions involving Bulgarian targets and earn-out mechanisms the seller/founder typically remains as manager during the earn-out period. This creates a tension as the seller has both the incentive and the operational means to influence the metrics on which earn-out is calculated. On the other side, the buyer could suppress potential earn-out payments, for example by relocating revenues or customers to group entities, introducing new cost allocation methodologies from the buyer’s group or depriving the target of investment during the earn-out period.
This naturally leads to the common debate in cross-border M&A transactions on the efforts that each party (and, in this case, most critically the buyer) should exercise in operating the target post-closing and the applicable standard of care – ‘best efforts’, ‘commercially reasonable efforts’, ‘commercially best efforts’ etc. Disputes may arise as to whether a buyer’s post-closing actions meet one of these standards. The Bulgarian COA provides for general obligations of ‘good faith’ in contract performance, but does not contain a developed doctrine on its application in the context of earn-out mechanics, nor any specific court practice exists in that regard. Therefore, earn-out provisions should be drafted with a strong emphasis on the specific conduct and efforts expected from the parties (e.g. maintaining certain historical business practices, retaining key employees for a defined minimum period post-closing, or – as a simpler approach from a buyer’s perspective – only committing to a specified level of investment during the earn-out period), rather than relying on subsequent litigation to determine the exact scope of the applicable standard of care.
4. Dispute Resolution: Arbitration vs Expert Determination
When earn-out disputes arise, two resolution mechanisms are typically available: court litigation/arbitration or expert determination where an independent accounting expert (usually an agreed Big Four firm or certified accountant) determines the earn-out calculation.
For earn-out accounting disputes specifically, expert determination is the strongly preferable option. A nominated independent expert, with the expert’s calculation being contractually binding subject only to manifest error, is both faster and more efficient dispute resolution mechanism for the type of dispute that may typically arise. The SPA should clearly specify the expert’s scope of mandate (limited to accounting calculation and excluding questions of whether a party has complied with its contractual obligations), nomination mechanism, the information the expert is entitled to review, the timeframe for the determination, and the cost allocation.
An important note to consider is that expert determination is characterised under Bulgarian law as a form of contractual dispute resolution, not as arbitration. It is contractually binding on the parties, but not enforceable as an arbitral award, meaning that enforcement of the expert’s findings would require a separate claim before the courts if one party fails to abide to it. The SPA should include an express obligation to pay earn-out amounts as determined by the expert, possibly with a contractual penalty for late payment, to reduce the risk of a second round of litigation.
5. Earn-Out as Management/Employment Bonus: Implications
Where earn-out payments are structured as management bonuses payable by the target company, the following Bulgarian law issues arise:
• Management bonuses payable to employees are subject to income tax withholding and social security contributions, which reduces the net economic value of earn-out payments unless the gross/net mechanics are explicitly agreed.
• Where the seller/founder is a managing director under a management contract (rather than an employment contract, a distinction that is significant in Bulgaria), social security implications differ and the management contract should be reviewed for consistency with the earn-out mechanics.
6. Good Leaver / Bad Leaver Provisions and Their Interaction with Earn-Outs in Bulgaria
Where some or all of the sellers are retained as minority shareholders post-closing, earn-out provisions almost always coexist with good / bad leaver provisions. While the first are set out in the SPA, the latter are governed by a Shareholders Agreement (SHA). No connection between these two documents is implied under Bulgarian law and therefore the SHA and SPA should explicitly cross-reference each other, so that earn-out entitlement does not survive independently of a bad leaver classification under the SHA.
A bad leaver classification (typically covering resignation without good reason, termination of service/employment agreement for cause or material breach of SHA provisions, such as non-compete obligations) generally results in loss of the affected shareholder’s equity and full loss of any unvested or future earn-out entitlements. An important consideration in that regard is that where post-closing the selling shareholder remains within the company as an employee (as opposed to a managing director under a management contract), the Labour Code imposes mandatory protections that cannot be contracted out of. Termination of employment under Bulgarian law is a formalistic process that can be conducted on grounds exhaustively defined and possibly narrower than the typical contractual ’cause’ definition. Failing to cover in the bad leaver clause conduct that would typically constitute contractual cause for termination, but not statutory cause for dismissal under the Labour Code, could create major risk for buyers. For this reason, Bulgarian investment structures should strongly favour the management contract form over employment contracts for remaining shareholders/managers. Where this is not possible, the bad leaver provisions must be drafted with particular care to account for the possible mismatch between contractual cause definitions and the exhaustive Labour Code grounds for dismissal and court practice on disciplinary violations.
7. A final thought
While earn-outs are useful tools for bridging valuation gaps and will remain highly relevant, parties should be aware that they are not cost-free. The longer the earn-out period, the more likely is that some form of dispute may arise. Earn-out negotiations to some extent postpone the valuation disagreement rather than fully resolving it and in a jurisdiction without established earn-out court practice, the cost and unpredictability of that postponed dispute is naturally higher. Where the valuation gap is relatively small, upfront price compromise may be preferable to earn-out complexity. Alternative bridging mechanisms also worth considering include, among others, rollover equity or (depending on the source of disagreement on valuation) escrow holdback of a portion of the purchase price.
This article is for informational purposes only and does not constitute legal advice.
[1] Available at https://www.srsacquiom.com/our-insights/deal-terms-study/