What Is an Earn-Out in a Business Sale in BC?

This answer covers the law of British Columbia.

An earn-out is a deal term where part of the price is not paid at closing and depends on how the business performs afterward, often measured by revenue or profit over a set number of months or years. How results are measured, who controls the business meanwhile and how disputes are settled all depend on the written agreement, so the definitions matter as much as the headline number.

Disputes tend to arise over how revenue or profit is calculated, whether the buyer may change prices, staff or costs, and what happens if the business is merged or sold. Ask for the formula, the accounting method, reporting and review rights, and a clear dispute process to be written down. A lawyer or accountant can help test these terms before you sign.

Tax timing is also worth raising. A capital gains reserve lets a seller who is paid over time spread the gain, and most reserves can be claimed over a maximum of four years, so the gain is included over five years. A nine-year period applies in some cases, such as certain transfers to children and some qualifying business transfers. Whether a reserve fits an earn-out depends on the facts, so confirm it with an accountant.