Earnouts defer part of the purchase price contingent on post-closing performance. Disputes involve metric calculation, accounting methodology, and whether the buyer operated the business in a manner permitting achievement.
Implied covenant claims are common.
Alternative Names:
Earn-Out Dispute|Contingent Consideration Dispute
Why it Matters?
Earnouts generate litigation at a rate exceeding almost any other deal term, because the buyer controls the business while the seller bears the consequence of underperformance. Express covenants specifying operating commitments are what prevent implied covenant claims, since silence invites an argument that the buyer must use reasonable efforts. Metric definitions should also specify the accounting principles, since a change in methodology can defeat a target without any operational change.
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Frequently asked questions
Why do earnouts generate so much litigation?
What prevents those claims?
