With valuation gaps between buyers and sellers still wide in much of the mid-market, earn-outs have become a standard bridge again. In our disputes practice, we are already seeing the second-order effect.

Earn-outs that were agreed quickly are now being argued about slowly.

Most earn-out disputes start at signing, not at the measurement date. The clauses that cause trouble are usually the ones the deal team treated as boilerplate: how the metric is calculated, which accounting policies apply, and what the buyer may or may not do with the business during the earn-out period.

Operating covenants are the battleground. Sellers want protection against a buyer that integrates, re-prices or redirects the business in a way that depresses the metric. Buyers want freedom to run what they have bought. A general "good faith" or "not to act with the primary purpose of reducing the earn-out" standard rarely resolves that tension. Specific, tested covenants do.

The accounting definitions need a worked example. We regularly recommend attaching an illustrative calculation to the purchase agreement. It is the single most effective way to reduce later arguments about what the parties meant.

Choose the forum deliberately. Expert determination works well for pure accounting questions. It works badly when the real dispute is about whether the buyer breached an operating covenant. Many agreements now split the two, sending calculation disputes to an accounting expert and everything else to arbitration or court.

Cross-border deals add a layer. When a US buyer acquires a UK business with an earn-out, the governing law, accounting standards and dispute forum may each point in a different direction. Aligning them at signing is far cheaper than arguing about them later.

Information rights are underrated. Sellers who leave the business after closing often have no visibility of how the metric is tracking until the statement arrives. Monthly or quarterly reporting, access to management accounts and a right to raise concerns early can stop a disagreement from becoming a dispute. Buyers benefit too: an early conversation is cheaper than an arbitration.

Acceleration triggers deserve attention. What happens to the earn-out if the buyer sells the business, integrates it into another division or loses a key customer? Many disputes arise because the agreement is silent. Clear acceleration or adjustment mechanisms for these events give both sides certainty.

Set-off is a flashpoint. Buyers often want to set off warranty or indemnity claims against earn-out payments. Sellers resist. Whatever the parties agree, it should be explicit, because an unexpected set-off is one of the quickest ways to start a fight.

None of this means earn-outs should be avoided. They remain one of the most useful tools for getting a deal done.

But they should be drafted as if they will be litigated.

If you are negotiating an earn-out, or already in a dispute about one, contact James Thornton in Chicago. Our disputes and M&A teams work together on both sides of the line.