Earn-outs are where deals go to fight: five drafting lessons from three years of post-closing disputes

An earn-out is a disagreement about value that both sides have agreed to postpone. When the milestone period ends, the disagreement returns — now with hindsight, an audited number, and counsel. Having spent the last three years litigating and arbitrating these disputes from both sides, we see the same five drafting failures over and over. None of them is exotic. All of them are avoidable.

1. Define the metric like an accountant, not a negotiator

The single most litigated phrase in earn-out practice is a revenue or EBITDA definition that incorporates 'GAAP, consistently applied' without saying whose past application controls. Post-closing, the buyer's controller applies the buyer's policies — often defensibly — and the milestone evaporates. Specify the reference financials, the accounting policies that govern, and who wins when GAAP permits more than one answer.

2. Write the operating covenant you actually mean

Sellers routinely accept a covenant that the buyer will not take actions 'intended to reduce' the earn-out. Intent is nearly unprovable. Courts in most jurisdictions will not imply an obligation to run the business to maximize the earn-out; if the seller needs a commitment to maintain sales headcount, marketing spend, or product pricing, the agreement has to say so in operational terms a judge can measure.

3. Choose the referee before the fight

Purchase-price and earn-out disputes increasingly route to an independent accountant while everything else goes to court or arbitration. The boundary between an 'accounting disagreement' and a 'breach claim' is where the real fight happens — parties characterize the same dispute to land in their preferred forum. Draft the boundary explicitly, and decide in advance whether the accountant acts as expert or arbitrator; the standard of review on the back end differs enormously.

4. Interim reporting is cheap insurance

The seller who first learns the milestone was missed in a closing statement has already lost a year of record. Quarterly milestone reporting with audit rights costs the buyer little and gives the seller contemporaneous data — which, in our experience, prevents more disputes than it starts. Silence between signing and measurement is where suspicion compounds.

5. Model the formula against a bad quarter

Before signing, run the earn-out formula against a recession case, a delayed-integration case, and a divested-product case. If a plausible scenario produces an absurd result — a milestone missed by a rounding error, a cliff that pays zero at 99% achievement — assume it will happen and draft the cure now. Tiered payouts with linear interpolation litigate far less than cliffs.