An earnout defers part of the purchase price and conditions it on post-closing performance. It bridges valuation disagreements and generates a disproportionate share of post-closing disputes.
The structural problem. The seller’s payment depends on results the buyer now controls. Whatever the metric, the buyer has incentives that may reduce it.
Metric selection. Revenue is easiest to measure and easiest to shift. EBITDA invites disputes over allocated overhead, management fees and accounting policy changes. Milestones — a regulatory approval, a customer renewal — are cleaner but binary.
Accounting. Specify the policies and the consistency requirement, and address what happens if the buyer changes systems, consolidates the target, or adopts new standards. Attach an illustrative calculation.
Operating covenants. The most negotiated clause. Options range from a bare implied covenant of good faith to detailed affirmative obligations — maintain the sales force, no reallocation of accounts, agreed budget, no diversion of opportunities to affiliates.
Efforts standards. Commercially reasonable efforts to maximise the earnout, or an express disclaimer of any such duty. Silence is litigated; courts increasingly imply a limited duty of good faith.
Process. Statement, review period, access to records, objection procedure, and an accounting expert for calculation disputes as distinct from breach claims. Separating those two is what keeps expert determination workable.