Earn-outs bridge valuation gaps but cause more post-completion disputes than any other mechanism. A few drafting choices make most of the difference.
Earn-outs are back. With buyers and sellers still apart on valuation, deferred consideration linked to future performance has become a standard feature of mid-market deals. It is also the single largest source of post-completion disputes we see.
The usual points of failure
- Accounting policies that are described loosely or not at all.
- No restrictions on how the buyer runs the business during the earn-out period.
- Targets that depend on revenue the seller no longer controls.
- No quick, binding route to resolve a disagreement.
Each of these is solvable at the drafting stage, usually with a page of precise wording and a worked example appended to the agreement. That page is the best value legal fee on most transactions.
