Earn-out
An earn-out is a portion of the purchase price paid only if the business hits agreed targets after closing. It is used to bridge disagreement about what a business is worth: the seller believes the earnings will continue, the buyer is not certain, and the earn-out lets the outcome decide.
Earn-outs are common where a business has a short track record, a recent spike in earnings, concentrated customers, or heavy owner involvement — anywhere a buyer’s doubt is specific rather than general.
Why they generate disputes
The seller no longer controls the business but their payment depends on how it performs. A buyer who changes pricing, cuts marketing, absorbs the business into a larger group, or reallocates overhead can reduce the measured result without any bad faith at all. Most earn-out disputes are about measurement, not honesty.
What a well-drafted earn-out fixes in advance
- The exact metric — revenue is harder to manipulate than profit, and easier to verify
- The measurement period, and who prepares the statements
- What the buyer may and may not change during the period
- The seller’s access to records to verify the calculation
- How a dispute is resolved, and by whom
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryBuying & Selling a Business
- 03Treadstone LawLegal commentaryEscrow and Holdbacks in an Ontario Business Sale
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