Earn out agreements that spell out how later payments are actually earned

An earn out can look simple at a high level, but problems usually appear when the parties later try to work out whether a payment has actually been triggered. Terms like revenue, profit, margin or customer retention can mean very different things unless the agreement defines them properly. The document also needs to deal with reporting rights, accounting treatment, timing of calculations and what the buyer can or cannot do during the earn out period. Clear drafting matters because the disagreement often starts only after completion, when control of the business has already changed.

Most earn out agreements cover the performance period, the formula or milestones for deferred payments, when calculations are made, and when payment falls due. They often also include definitions for financial metrics, access to records, reporting obligations, dispute steps and restrictions on actions that could distort the outcome, such as shifting revenue, changing cost allocation or restructuring parts of the business. If the seller is staying involved after completion, the agreement may also address their role, authority and whether continued involvement affects entitlement to the earn out.

That usually turns on the sale structure, the business model and what the earn out is meant to measure. An earn out tied to recurring software revenue may need very different definitions from one based on hospitality turnover or consulting profit. We also look at who will control the business after completion, whether the seller remains involved, how seasonal the revenue is, and whether there are existing sale documents that the earn out must sit alongside. Those details shape the wording because small drafting differences can materially change how much becomes payable later.

A template may help you see the broad issues, but earn outs are usually too deal-specific for generic wording to do the job well. Many templates use broad concepts like EBITDA, net profit or revenue growth without explaining the calculation method, adjustments or reporting process in enough detail. They may also miss practical issues such as buyer conduct during the earn out period, access to information or the effect of changing the business structure after settlement. Where deferred consideration depends on later performance, vague wording can create competing interpretations at exactly the point money is on the line.

The timeframe usually depends on how much of the commercial position has already been agreed and whether there are existing sale documents to work from. If the parties already have a settled framework for the earn out, the legal work is generally more straightforward. We will usually need the key deal terms, proposed metrics and any related sale documents that affect the deferred payment mechanics. Once the draft or review is completed, you can consider the wording, request updates within scope and use the document in negotiations with the other side.

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