Can a buyer’s own lender block payment of an earn-out that has already been earned?

The rule

No statute governs the priority between a buyer’s senior credit facility and an earn-out payable to a seller. The earn-out being objectively earned under the purchase agreement’s own metric does not, on its own, create a payment right the buyer’s lender has to honour — the purchase agreement and the credit agreement are two separate contracts, and the lender is not a party to the first one. A negative covenant blocking any payment classified as an “Earn-Out Obligation” while leverage exceeds an agreed ratio binds the buyer regardless of whether the underlying acquired business performed exactly as promised.

When this changes

Whether the seller has any recourse turns entirely on what was negotiated at signing. A seller who negotiated hard over the earn-out metric and the audit right, but never addressed what happens if the metric is hit and the buyer’s own financing blocks payment, is left with an ordinary breach-of-contract claim against a buyer that may be genuinely unable to pay without itself breaching its lender’s covenants — a materially weaker position than a payment obligation that was actually secured or guaranteed at signing.

Where This Plays Out in the Case Files

See it decided in the earn-out-blocked-by-the-lender case file and the earn-out-overhead-allocations file.

Sources

• • No statute governs the priority between a buyer’s senior credit facility and an earn-out payable to a seller; the outcome depends entirely on the purchase agreement’s own terms and the buyer’s credit agreement.
• • Treadstone Law — loan covenants in Ontario business acquisition financing: what buyers agree to — directly on point; explains the financial and operating covenants, including leverage tests, typical in acquisition financing.
• • Treadstone Law — can I insist an earn-out be capped so I know my maximum exposure as a buyer? — adjacent background on earn-out structuring from the buyer’s side.