An earn-out is often introduced as a compromise. The seller believes the business is worth more; the buyer wants evidence before paying the difference. Part of the consideration is deferred and becomes payable if revenue, gross profit, EBITDA, customer retention, a regulatory milestone or another agreed measure is achieved.

That description is economically incomplete. The metric will be measured after ownership changes. Budgets may be revised, teams reorganised, products integrated, contracts reassigned and costs allocated through a wider group. The seller may retain exposure to the result while losing the authority that produces it.

A Delaware Court of Chancery opinion issued on 18 September 2026 makes the point unusually clear. In Winton v. The North Highland Company, the purchase agreement tied part of an earn-out to gross profits from qualifying projects and created a notification and classification process involving the seller representative. After closing, the buyer controlled the systems containing the information needed to identify those projects. The court held that the buyer had to provide limited disclosure sufficient to make the negotiated process work, while declining to create the broader access the seller sought.

The lesson is not that every seller is entitled to continuous access or operational influence. It is more precise: a contingent-price mechanism cannot be evaluated separately from the information and decisions needed to operate it.

Start with the metric—but do not stop there

“Revenue” and “EBITDA” sound objective until the business changes.

If the earn-out is based on revenue, the agreement may need to address bundled contracts, renewals, discounts, rebates, returns, cross-selling, customer transfers and revenue booked through another group company. If it is based on EBITDA, the list expands: management charges, shared services, hiring, integration expenses, purchase accounting, restructuring, transfer pricing, capitalisation policies and the timing of investment.

The metric should be defined through a calculation hierarchy rather than a label. Transaction-specific principles come first; consistent historical policies may come next; the applicable accounting standards sit behind them. Worked examples are valuable because they expose disagreements that prose can conceal.

That precision matters beyond the formula itself. In Schneider National Carriers v. Kuntz, the Delaware Court of Chancery found ambiguity in negotiated post-closing operating covenants and concluded that the evidential conflict required trial rather than summary judgment. Transaction history is a costly substitute for language that makes the intended operating obligation clear.

The parties should also test discontinuities. What happens one euro below the threshold? Is there a sliding scale, a cap, a catch-up or a cliff? Does an acquisition, disposal or major customer transfer reset the baseline? Can underperformance in one period be recovered in the next? The formula should describe the economics the parties actually intend, including the downside.

Map the decisions that can move the result

The operating-control analysis should be built alongside the formula. List the decisions capable of changing the earn-out metric and identify who controls each one after closing.

Typical questions include:

Can the buyer combine the target with another business or move customers, people or intellectual property?
Who sets the budget, pricing, headcount, marketing spend and capital expenditure?
How are group overhead, financing costs and shared services allocated?
Can the buyer discontinue a product, redirect a lead or change the route to market?
What happens if integration is delayed, accelerated or redesigned?

The objective is not to freeze the business. A buyer needs room to protect the acquired company, comply with law, respond to markets and integrate where the transaction thesis requires it. Equally, a seller should not assume that a general good-faith concept will reconstruct protections that were not negotiated.

The design choice is explicit: reserve selected decisions, adjust the metric for defined buyer actions, require a specified operating standard, or accept broad buyer discretion and price the contingent consideration accordingly.

Information rights are part of the consideration

An earn-out becomes unverifiable when the party entitled to payment cannot see the data that determine it.

Information rights should specify the reports, underlying records, delivery timetable, level of detail, access protocol and confidentiality safeguards. They should cover not only the final certificate but also the period in which corrective action may still be possible. A quarterly dashboard may be more useful than a large document production after the measurement period has ended.

The Winton opinion is useful because it treats access as instrumental. The seller representative obtained the information necessary to participate in the agreed classification process—not an unrestricted window into the buyer’s systems. This is a practical drafting principle: connect each information right to a contractual decision, calculation or challenge.

The same discipline protects the buyer. Defined reporting reduces repeated requests, limits access to sensitive group data and creates a contemporaneous record of how the metric was applied.

Separate calculation disputes from legal disputes

Many earn-outs send disagreements to an independent accountant. That can be effective for calculations within a defined technical remit. It does not automatically answer whether the buyer breached an operating covenant, withheld required information or interpreted the agreement correctly.

In Georgia Security Solutions v. NewCBN, a motion-to-dismiss ruling decided on 3 August 2026, the Delaware Court of Chancery distinguished the independent accountant’s technical remit from foundational legal questions, treating the former as within the expert-determination mechanism while indicating that the latter remained for the court. Because the opinion addressed only whether claims survived dismissal and did not decide the ultimate merits, it illustrates why the dispute clause should allocate jurisdiction rather than merely name an expert.

The agreement should define the review period, objection content, access to supporting records, negotiation window, expert mandate, legal forum, burden of costs and finality of each determination. Otherwise, the first dispute may concern who is authorised to decide the dispute.

Account for the earn-out before relying on the headline price

Contingent consideration is not simply “extra price if things go well.” IFRS 3 requires the acquirer to address contingent consideration at the acquisition date, including its fair value and classification, with subsequent accounting depending on the instrument and applicable standards. IFRS 3 also requires the acquirer to assess whether arrangements linked to continuing employment constitute part of the business-combination consideration or post-combination employee remuneration; amounts classified as remuneration fall outside IFRS 3 and are accounted for under other applicable standards.

Tax treatment can also vary with the form of the right, the consideration delivered, employment conditions, residence and jurisdiction. HMRC’s 2026 guidance applies to UK tax treatment, expressly notes the complexity of earn-out classification and directs taxpayers to professional advice; it is not cross-border tax guidance.

Boards should therefore compare three numbers: the fixed amount payable at closing, the probability-weighted value of the contingent component and the maximum headline consideration. Only the first is certain at closing. The second depends on assumptions and control. The third is not a valuation result.

Build one earn-out architecture

A robust earn-out can be tested through four connected maps:

Metric map: definition, accounting hierarchy, adjustments, thresholds, caps and worked examples.
Control map: post-closing decisions that can change the metric and the agreed treatment of each.
Evidence map: reports, systems, access, timing and confidentiality needed to verify performance.
Dispute map: which issues go to management, an expert or a court, under what timetable and with what finality.

If one map is missing, the valuation bridge may be only apparent. The formula can be precise while the operating environment remains discretionary. The covenant can be protective while the seller lacks evidence. The expert can be credible while lacking authority over the real disagreement.

An earn-out should not be negotiated as a percentage of price left for later. It should be negotiated as a post-closing governance system for a claim whose value depends on decisions made after control has transferred.

CGPH Banque d’affaires supports companies, shareholders and buyers with transaction strategy, valuation and structural analysis, process preparation, counterparty engagement and negotiation support within an agreed mandate. Company-specific legal, tax, accounting, regulatory and valuation conclusions remain with appropriately qualified advisers.

Sources

This article is for general information only and does not constitute investment, legal, tax, accounting, regulatory or valuation advice.