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When a buyer and seller can’t agree on a business’s value upfront, an earn-out is often floated as the compromise: the seller gets part of the purchase price at completion, and the rest later, contingent on the business hitting agreed performance targets. It sounds like a clean solution to a valuation gap — but earn-outs are one of the most heavily litigated features of business sale agreements, precisely because so much rides on how they’re drafted.

Key Takeaways

• An earn-out splits the sale price: part is paid at completion, and the rest later if the business hits agreed performance targets.
• Once the sale completes, the buyer usually controls the business, which is why disputes often centre on decisions that affect the seller’s remaining payment.
• Sellers negotiating a business sale agreement should push for clear metrics, operating covenants, access to information, a dispute resolution mechanism, and acceleration triggers.
• Buyers should guard against an earn-out clause that rewards short-term decisions at the expense of the business’s long-term value.

Why Do Earn-Outs Cause Disputes?

Once the sale completes, the buyer is usually running the business — and the seller, whose remaining payment depends on the business’s performance, no longer controls the decisions that drive that performance. Disputes commonly arise when:

• The buyer changes pricing, staffing, marketing spend, or suppliers in ways that depress short-term performance (even if arguably good for the business long-term)
• The buyer integrates the acquired business into a larger operation, making it hard to isolate its standalone performance
• The financial metrics used to measure the earn-out are ambiguous or open to different accounting interpretations
• Extraordinary events (a lease renewal falling through, a key staff departure, a supplier issue) affect performance and it’s unclear whether they should be excluded from the calculation

What Should Sellers Negotiate For?

• Clear, objective metrics. Revenue is usually easier to verify than profit-based metrics, which can be affected by how the buyer allocates overheads and costs post-completion.
• Operating covenants. A clause requiring the buyer to run the business in a manner consistent with past practice during the earn-out period reduces the risk of the buyer inadvertently (or deliberately) undermining performance.
• Access to information. Sellers should retain a right to review management accounts and underlying records during the earn-out period, so they’re not relying solely on the buyer’s own figures.
• A defined dispute resolution mechanism, such as referral to an independent accountant, if the parties disagree on whether targets were met.
• Acceleration triggers. Consider what happens if the buyer sells the business, or a controlling stake, during the earn-out period — should the full earn-out become payable immediately?

What Should Buyers Consider?

Buyers aren’t immune to earn-out risk either. An earn-out that’s too generous, or poorly defined, can incentivise a seller who’s stayed on to run the business toward short-term decisions that inflate the metric being measured — at the expense of the business’s actual long-term health, which the buyer now owns.

Is an Earn-Out Always the Right Answer?

Not necessarily. An earn-out is a useful tool for bridging a genuine valuation disagreement, particularly where the business’s growth depends on the outgoing owner’s relationships or reputation. But it isn’t a substitute for proper diligence on both sides, and it works best when both parties are realistic about how much control the seller is giving up the moment the sale completes.

If you’re negotiating a sale or purchase involving deferred consideration, get the earn-out mechanism reviewed before you sign. Contact Gladwin Legal to discuss your sale or purchase agreement.

This article is general information only and does not constitute legal advice.