When a buyer and a seller cannot agree on value, the usual bridge is an earn-out. Part of the price is paid at completion and part depends on how the business performs afterwards. The seller gets the chance to prove the forecast, the buyer avoids paying for growth that may not arrive.
It is a sensible instrument and it generates a disproportionate share of post-deal disputes. Almost all of them are foreseeable at drafting.
The structural problem
The seller’s payment depends on the performance of a business the buyer now owns and controls.
Everything difficult follows from that. The buyer can restructure, reallocate costs, change pricing, redirect sales effort, integrate systems, or simply make ordinary commercial decisions that happen to depress the earn-out metric. Some of that is deliberate. Most of it is not. The seller cannot easily tell which, and that is the ground on which earn-out disputes are fought.
Pick a metric that survives the buyer
Revenue is the cleanest to measure and the hardest to manipulate, but it rewards volume regardless of margin, and buyers rightly dislike it. Profit aligns better with value and hands the buyer a long list of levers: management charges, allocated overheads, transfer pricing on intra-group sales, shared services, the cost of integration itself.
If the metric is profit, it has to be defined to a level of detail that feels excessive at the time. State the accounting policies that apply. Exclude group recharges and allocated central costs. Exclude the costs of the acquisition and of integration. Say what happens to synergies. Say which standards apply if they change mid-period.
A useful discipline is to take the definition and calculate the metric for the two years before the deal. If the parties cannot agree on what the number would have been for a period that has already happened and is fully documented, the definition is not ready.
Non-financial metrics work well where they fit: customer retention, a contract renewed, a regulatory approval, a headcount retained. They are binary, cheap to verify and nearly dispute-proof.
Protect how the business is run
Metric definition is only half. The seller needs operating covenants over the earn-out period, and this is where sellers under-negotiate.
Run the business as a separate unit with its own records. Maintain the sales and marketing spend at an agreed level. No transfer of customers, contracts or staff out of the entity. No change to accounting policies for earn-out purposes. Consent rights over disposals or major changes. The seller keeps a defined role with the authority to affect the outcome.
Buyers resist these because they constrain integration, which is often the point of the acquisition. That tension is real and it is better surfaced in negotiation than discovered afterwards. Sometimes the honest conclusion is that the buyer intends to integrate immediately and an earn-out is simply the wrong structure.
The mechanics people skip
Who prepares the earn-out accounts, in what timeframe, and to what standard. Usually the buyer, which makes the seller’s access rights important.
What the seller can see: the underlying records, the working papers, a right to ask questions and receive answers within a stated period.
How a dispute resolves: an independent expert rather than litigation, with the expert’s remit defined and the costs allocated.
Whether the earn-out accelerates on a subsequent sale of the business, which is the omission that produces the worst outcomes. A buyer who sells on during the earn-out period can otherwise leave the seller holding a claim against an entity that no longer operates as it did.
Whether there is a cap, a floor, or a sliding scale. Cliff-edge thresholds, where all of it pays at one hundred per cent of target and none at ninety-nine, create an incentive to game the final weeks in both directions. A sliding scale removes that.
Both sides should model it
Before signing, run the earn-out calculation across the base case, the downside and a case where the buyer does ordinary integration things. If a plausible scenario produces a number either side would find outrageous, fix the drafting rather than trusting the relationship.
The earn-outs that settle quietly are the ones where the metric was narrow, the period was short, the protections were specific and both parties had already seen the arithmetic. The ones that end in expert determination are the ones where everybody agreed the principle and left the definition to the lawyers at two in the morning.