Anonymised, illustrative composite. A revenue-based earn-out came with a covenant protecting the seller’s sales team specifically. When the buyer reassigned three of five reps mid-measurement-period, the seller pursued deemed achievement as a breach remedy, not an accounting dispute.
At a glance
A founder-owned distributor sold for a $5,200,000 base price with up to $1,000,000 of additional earn-out tied to Year 1 post-closing revenue against a $6,500,000 target, paying out on a sliding scale starting at 80% of target. The seller’s counsel, having seen how these disputes usually go, negotiated an operating covenant that went further than a generic good-faith clause: it specifically named the company’s five-person sales team and barred the buyer from reassigning or terminating any of them during the earn-out measurement period without the seller’s consent.
Five months into the measurement period, the buyer reassigned three of the five sales reps to a sister division to cover a staffing gap there — a decision made for reasons entirely unrelated to the acquired business, and one the covenant expressly required the seller’s consent for. No consent was sought or given. The buyer’s integration team later characterized the move as a routine resourcing decision inside a combined organization, which is exactly the kind of argument a generic good-faith covenant leaves room for and a named-resource covenant does not.
The pre-close pipeline run-rate implied $6,300,000 of annualized revenue split across five reps, or $1,260,000 per rep. With three reps reassigned for the remaining seven months of the measurement period, lost revenue was calculated at $1,260,000 × 3 × (7/12) = $2,205,000. Actual revenue for the period came in at $4,095,000 ($6,300,000 minus the $2,205,000 shortfall) — well under the $5,200,000 threshold where any earn-out payment starts, producing an earn-out payable of $0 on the numbers as actually achieved.
Because the covenant named the sales team specifically and required consent for reassignment, the reassignment itself was a contract breach independent of any dispute over the revenue calculation — the calculation was correct; the conduct that produced the underlying revenue was not permitted. Treadstone Law’s guidance on earn-out disputes describes exactly this fork: a purchase agreement “may include covenants requiring the buyer to operate the business in good faith, in the ordinary course, or without taking actions specifically intended to reduce the earn-out payment,” and the usual route for a purely financial disagreement is “referral of financial disputes to an independent accountant,” with “arbitration or litigation for broader disputes.” A breach of the operating covenant is the second kind, not the first: it is an ordinary contract claim, and the measure of damages is what the metric would have shown but for the breach. “Deemed achievement” is negotiating shorthand for that measure, not a statutory remedy — no Act supplies it, and where the agreement does not deem the earn-out achieved on breach the seller is left proving the but-for number as damages. That is what the seller did here, using the pre-close run-rate as the baseline.
Deemed on the pre-close $6,300,000 run-rate, the earn-out payable calculates to (($6,300,000 − $5,200,000) ÷ ($6,500,000 − $5,200,000)) × $1,000,000 = $846,154 — against $0 payable on the actual, breach-affected revenue. The dispute settled with the buyer paying the seller a negotiated amount referencing that deemed-achievement calculation, well above the zero the raw numbers would otherwise have produced, and well before either side had to file anything in court. Compare the outcome in a structurally similar deal that had no such covenant, and see how post-closing operating restrictions are typically drafted.
Without the sales-team-specific covenant, this file would have looked like the contrasting case: a buyer’s legitimate-seeming staffing decision, a metric that came in short, and no contractual hook to recover any of the $846,154 gap between actual and deemed-achieved payout. The covenant’s specificity — naming the team rather than relying on a generic good-faith standard — is what converted a plausible business justification into an unambiguous breach the seller could enforce.
A generic “operate in good faith” covenant leaves room for a buyer to argue any given decision was a legitimate business call. Naming the specific resource the earn-out actually depends on — the sales team, a key customer relationship, a product line — removes that argument entirely. The tell for a seller reviewing draft earn-out language is whether the covenant protects the metric in the abstract or protects the specific thing that metric is actually going to depend on.
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