An earn-out puts the buyer in control of the business and leaves the seller exposed to how that control is used. When the two sides disagree about what the seller is actually owed, the purchase agreement — not goodwill — decides how that gets sorted out.
Key takeaways
Once closing happens, the buyer runs the business — pricing, staffing, marketing spend, product mix — while the seller is still financially exposed to how those decisions play out, often without any say. Disputes tend to cluster around two very different fact patterns: the buyer changes pricing, product lines, or service offerings in ways that depress the metrics, or diverts customers, referrals, or resources to another part of its business. Neither is a disagreement about how to add up a number — both are disagreements about what the buyer was allowed to do.
A smaller, more mechanical category of dispute sits alongside those: genuine disagreement over accounting methods, how a defined target was calculated, or difficulty isolating the acquired business's standalone performance once it has been folded into a larger operation. Longer earn-out periods make both categories more likely, a point developed in earn-out periods and why longer is riskier.
A workable earn-out clause specifies how the metric is calculated, who prepares the calculation, and a dispute-resolution mechanism for genuine disagreements. The strongest versions also 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 — drafting choices covered in more depth in protecting a vendor during the earn-out period.
The agreement should also say, in advance, which accounting policies apply, and which prevails when the specified policies conflict with GAAP — the same drafting discipline that governs a working-capital true-up. That single clause is frequently where a dispute is won or lost before it is even filed, because it removes the argument about which set of rules applies.
Financial disputes commonly go to an independent accountant, whose determination on a defined calculation question is typically final and binding with no appeal — the same mechanism Ontario purchase agreements use for a post-closing working-capital adjustment. Broader disputes over conduct or bad faith may fall outside that mechanism and require litigation or arbitration instead, because an accountant is equipped to recalculate a number, not to decide whether a buyer acted in bad faith when it discontinued a product line.
In practice, earn-out disputes are often resolved commercially — faster and more cheaply than through formal proceedings, particularly where the seller still has other leverage, such as an unpaid vendor take-back or a transition-services relationship the buyer still needs.
Canadian law requires an earn-out discretion to be exercised honestly and in good faith. That is a genuine legal constraint on a buyer's post-closing conduct, not just a drafting nicety. But proving bad faith is far harder and far more expensive than drafting around it — which is precisely why the explicit operating covenants above do more real work than the general good-faith obligation sitting underneath them.
A seller who retained a minority equity stake as part of the deal has one further, narrower option: CBCA s. 241(2) lets the court intervene where a corporation's affairs are conducted in a manner “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer” — and a creditor, which an unpaid earn-out claimant arguably is, sits inside that protected list. In practice this is a discretionary, fact-heavy remedy reserved for conduct well beyond an ordinary contract dispute, not a substitute for a properly drafted earn-out clause.
A national accounts business is sold with a two-year, revenue-based earn-out. Six months after closing, the buyer reassigns the acquired company's largest customer relationship to a sister division that reports revenue separately, on the stated rationale of “integration efficiency.”
The seller's agreement includes a covenant against diverting customers or resources away from the acquired business specifically to reduce the earn-out. The seller notifies the buyer under the agreement's dispute clause, and the parties first attempt the contractually specified route: an independent accountant reviews the revenue recognition and confirms the customer's historical revenue belongs, by the agreement's own definition, inside the earn-out calculation.
The buyer disputes the accountant's authority to decide a customer-attribution question rather than a pure arithmetic one, arguing it falls outside the accountant's mandate and into the conduct-and-bad-faith category the agreement carved out for arbitration. That jurisdictional argument — whose dispute-resolution track applies — is itself a common secondary fight, which is exactly why the clause needs to say, at signing, which questions go where.
The purchase agreement should specify this. Common approaches are to split the cost evenly, or to have the losing party bear it — either way, leaving it unaddressed invites a second dispute layered on top of the first.
Yes, where the claim is that the buyer's conduct — not its arithmetic — caused the metric to miss. Diverting customers, changing pricing to depress the metric, or shifting resources away from the acquired business are conduct claims, and they typically proceed outside the accountant-determination mechanism reserved for calculation disputes.
Only if the purchase agreement says so. An arbitration clause in the agreement can require conduct disputes to go to a private arbitrator instead of the courts, but that has to be drafted in; absent an arbitration clause, a conduct-based earn-out dispute defaults to ordinary litigation.
Usually yes, in the sense that the underlying business relationship — and the seller's financial exposure to it — continues to run through the rest of the earn-out period regardless of an active dispute over one measurement window. This is one more reason the dispute-resolution mechanism matters as much as the substantive covenant: a slow, adversarial process during an earn-out that still has time left to run keeps the seller exposed to the exact conduct being disputed.
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