How does an earn-out work when selling a business in Ontario?
An earn-out is a deal structure where a portion of the purchase price is paid after closing, contingent on the business hitting certain financial targets — typically revenue, EBITDA, or gross profit — over a specified period. Earn-outs are common when the buyer and seller disagree on the business's value or future performance.
In Ontario business sales, earn-outs create significant post-closing complexity. The seller must usually continue working in or overseeing the business during the earn-out period. Disputes often arise over how performance is measured, whether the buyer's post-closing decisions (changing pricing, reducing marketing spend) artificially depressed the earn-out metrics, and how accounting policies are applied.
To minimize disputes, the earn-out agreement should specify: the exact financial metric, accounting methodology, the buyer's post-closing operating obligations (or restrictions), how disputes are resolved (often an independent accountant), and what happens if the business is sold again before the earn-out period ends.
Sellers should be cautious about earn-outs that represent a large share of the total price — once you hand over the keys, your ability to influence results diminishes considerably.
Key takeaways
- An earn-out ties part of the purchase price to post-closing business performance.
- Disputes over measurement and buyer influence on results are very common.
- Define the metric, accounting methodology, and buyer operating obligations precisely.
- Large earn-out portions are risky for sellers who lose operational control at closing.