What happens if an earn-out target is missed?

An earn-out bridges a disagreement about value by making part of the price depend on performance. It also hands the buyer control of the business whose performance determines what the seller gets paid, which is where the trouble lives.

The structural conflict, stated plainly

After closing the buyer runs the business and has an economic interest in the target being missed. Most buyers do not act on that, and most shortfalls are genuine. But a buyer who cuts marketing, raises prices, reallocates staff, changes the accounting treatment of revenue, or routes sales through an affiliate can depress the measured result while making defensible commercial decisions.

What protects a seller is drafting, not good faith

Operating covenants for the earn-out period — maintaining marketing spend at a stated level, not transferring the customer base, keeping the business as a separate reporting unit, preserving the accounting policies used to set the target. Plus access rights: the seller should be entitled to the figures and to supporting records, not just to a number.

Define the metric tightly

Revenue is harder to manipulate than profit and is therefore the safer basis for a seller; profit better reflects what a buyer actually gained. Whichever is used, the definition has to say which items are included and excluded, and what happens to costs the buyer introduces — head-office allocations and management fees are the classic way a profitable unit stops being profitable.

Name the dispute mechanism in advance

An independent accountant appointed to determine the calculation, with a short timetable and costs allocated, resolves most disagreements quickly. Without a mechanism the seller’s only route is litigation over a sum that may not justify it — which is the practical reason badly drafted earn-outs favour buyers regardless of merit.