M&A · MAY 2026
Earn-outs are where founder deals go wrong
A short guide to measurement periods, accounting covenants, and the disputes we see most often two years after closing.
The measurement period is the whole negotiation
An earn-out measured on revenue over one year and an earn-out measured on EBITDA over three are not variants of the same deal; they are different deals. Shorter periods and higher-in-the-income-statement metrics favour the seller, because there are fewer places for the number to be eroded on its way down the page. Decide which side of that you are on before discussing the headline figure.
Write the accounting covenant, or lose the argument later
Most earn-out disputes are not about bad faith. They are about a buyer who consolidated the target into a shared services model and allocated overhead to it, entirely reasonably, and a seller who never agreed to that allocation. Say in the agreement which policies apply, whether allocations are permitted, and what happens if the buyer changes its own accounting mid-period.
Operating covenants a buyer will actually accept
A seller cannot run the business after closing, and a buyer will not accept a veto. What a buyer will usually accept is a duty not to take action for the purpose of reducing the earn-out, plus a small number of concrete commitments: keep the sales team funded at a stated level, keep the product line, do not move the customer contracts. Concrete beats general every time.
Dispute mechanics, agreed while everyone is friendly
Name the independent accountant in the agreement, state that its determination is final absent manifest error, give the seller audit rights with a real deadline, and put the fees on the party whose number is further from the determination. That last clause settles more earn-out disputes than any other sentence in the document.