The earn-out missed target. Operations were flat to slightly up. The gap was entirely new charges the business had never paid as a standalone company.
Short answer
Only if the earn-out’s own definition of EBITDA lets it. No statute governs how an earn-out’s EBITDA is calculated, so a buyer that integrates the target into its corporate group and starts charging a management fee, an IT allocation, or a share of group insurance can lawfully suppress the target’s reported post-closing earnings — unless the purchase agreement’s “Earn-Out EBITDA” definition specifically excludes exactly those corporate allocations.
The entire mechanic runs through the purchase agreement’s own defined term, because no statute defines EBITDA or governs an earn-out’s cost allocations. An “ordinary-course” covenant restrains how the buyer conducts the business, not how it accounts for what it charges the business — those are two different promises, and a buyer can honour both while still eating the earn-out through overhead it was never obligated to avoid charging.
The fix is drafted before signing, not litigated after: an exhaustive exclusion list inside the “Earn-Out EBITDA” definition itself, excluding any new corporate or management fee, IT allocation, insurance charge or other cost the target never carried as a standalone business, anchored to the target’s own historical accounting rather than the buyer’s post-integration cost structure. A generic “operate in the ordinary course” covenant is not a substitute for that list — it restrains conduct, and charging a new allocation is an accounting choice, not a change in how the business is run day to day, so it slips past a conduct covenant cleanly. An audit right over the earn-out calculation helps a seller SEE the problem; only the definition itself stops the buyer from creating it.
See it decided in the earn-out-overhead-allocations case file, the earned-earn-out-blocked-by-the-lender file and the buyer-synergy EBITDA credit file.
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