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Applying Lean Analytics to Performance Metrics in M&A Earnouts

Ever since the dawn of internet, a new wave of fast-growing software companies has 
emerged. The M&A scholars have struggled to find appropriate valuation mechanisms 
for unprofitable companies with ultra-high revenue growth. To overcome the uncertain 
future, a contractual provision called earnout is often used. An earnout is a contractual 
provision in a M&A-deal that states the seller of the business is to obtain additional 
compensation in the future if the business achieves certain metrics. 
The purpose of this study is to contribute to practice and nascent literature by exploring 
and evaluating metrics for SaaS-companies that can be used in earnouts. The study applies 
Lean Anaslytics to suggest a framework for choosing what metrics to use, and discusses 
how to avoid sub-optimisation and metric manipulation. 
In order to answer the research questions, a qualitative, exploratory and abductive methodology 
was used. The study combines a literature and thought leader review and interviews 
to explore certain areas, with a case study that applies the findings. 
The study suggests that the process for determining metrics should start with the buyer’s 
acquisitions strategy. For acquisitions where the objective is to access talent, technology 
or accelerate product road-map, the study has shown that earnouts in most cases not be 
used at all. If the acquisition is made based on financial objectives, Lean Analytics can 
be used to determine what stage the seller’s company is in. Understanding what stage 
the company is in is crucial as the type of metrics that matter differ depending on stage. 
The study suggests that the most suitable earnout metric for M&A based on financial 
objectives is monthly recurring revenue (MRR). The metric must be clearly defined so it 
cannot be manipulated. The reason why many other metrics from Lean Analytics cannot 
be used is that they are vulnerable to manipulation and can restrict the operating freedom 
for the entrepreneur.