Earn-outs that actually hold up: drafting for the downside

Why so many earn-out disputes are written into the deal long before completion — and how to avoid it.

Earn-outs are meant to bridge a gap in valuation, letting buyer and seller share the risk of a target's future performance. In practice, they are one of the most common sources of post-completion dispute — and most of those disputes are written into the deal long before completion.

The problem usually starts with the metric. Where an earn-out turns on a measure of profit, the parties must agree precisely how that measure is calculated, which accounting policies apply, and how the buyer's own decisions after completion will be treated. Vague drafting here is an open invitation to argument.

Equally important is conduct. A well-drafted earn-out sets out what the buyer can and cannot do during the earn-out period — whether it must run the business in the ordinary course, how shared costs are allocated, and what happens on a further sale. Without these protections, a seller can watch the target's apparent performance erode for reasons that have nothing to do with the business itself.

The practical lesson is to negotiate the downside, not just the headline number. Model how the formula behaves in bad scenarios as well as good ones, and make the dispute-resolution mechanism fast and expert-led. An earn-out that has been stress-tested before signing is far less likely to end up in front of a tribunal.