Structuring an Earn-In as a Hybrid Deal When Buying an Ontario Business

Not every buyer wants — or can afford — to pay full price on day one and walk away with 100% ownership. An earn-in structure lets a buyer start with a smaller stake, or none at all, and grow into greater ownership over time as they contribute capital, work, or results the parties agreed to in advance.

It's a hybrid by design: an earn-in often blends elements of a share purchase, an employment or management arrangement, and sometimes an asset-use agreement, staged across defined milestones rather than closed in a single transaction. Done well, it lets a buyer prove themselves and build equity gradually. Done with a handshake instead of a written agreement, it becomes one of the most disputed deal structures in small business transactions.

Earn-In vs. Earn-Out: Don't Confuse the Two

These terms get used interchangeably, but they describe opposite directions of money and ownership.

A single deal can technically include both, but they answer different problems. Confirm which one you're actually structuring before you start drafting.

How an Earn-In Typically Works in Practice

1. The buyer starts with a defined initial position. This might be a small minority share purchase, a management or consulting role, or a right to use certain business assets — the starting point varies by deal.
2. Milestones and a vesting schedule are fixed in writing before the buyer starts contributing anything. Common milestones include capital injected, time worked in the business, or specific performance targets reached.
3. Ownership increases in stages as milestones are met, typically documented through additional share purchases or subscriptions at each stage, not a single retroactive adjustment.
4. Governance rights adjust alongside ownership — a buyer holding only a small minority stake shouldn't expect full board authority, and the agreement should say explicitly when that changes.
5. A final buyout mechanism (or an option to reach one) is defined for the last stage, so both sides know what "full ownership" actually requires and by when the option must be exercised.

Why the Paperwork Has to Come Before the Work

The single biggest risk in an earn-in isn't the business underperforming — it's ambiguity about what was actually agreed. Disputes tend to surface around:

• Whether a milestone was actually met. Vague targets ("grow the business," "prove yourself") are unenforceable in practice. Milestones need objective, measurable definitions agreed in advance.
• What happens if a milestone is missed. Does the buyer's stake stay frozen, get reduced, or does the arrangement terminate? Silence on this point invites a dispute exactly when the relationship is already strained.
• What the buyer actually owns at each stage, and what rights come with it — voting rights, information rights, a board seat, a say in major decisions.
• How the final valuation for later stages is calculated, especially if the business's value has changed materially since the earn-in began.

A framework agreement — sometimes paired with an option agreement or a shareholders' agreement drafted for the full arc of the earn-in — should address all of this before the buyer contributes anything of value.

Restrictive Covenants During the Transition

Earn-ins often involve a departing owner staying on temporarily to support the transition, sometimes as an employee of the purchaser. That detail matters legally: since October 25, 2021, general non-compete agreements with employees have been prohibited under Ontario's Employment Standards Act, 2000. One of the narrow recognized exceptions covers a business seller who becomes an employee of the purchaser as part of the sale — which can make a properly structured earn-in one of the few situations where a purchaser can still lock in an enforceable non-compete from the outgoing owner. Getting the sequencing and documentation right matters here specifically because of that exception.

A Pre-Signing Checklist

• [ ] Milestones are defined in objective, measurable terms — not general aspirations.
• [ ] A vesting schedule ties specific ownership increases to specific milestones.
• [ ] Governance and voting rights at each stage are spelled out, not assumed.
• [ ] A dispute-resolution mechanism exists for disagreements over whether a milestone was met.
• [ ] The final buyout mechanism (price, timing, and any option to exercise) is defined up front.
• [ ] If a departing owner is staying on as an employee, restrictive covenants are documented as part of that employment relationship, with legal advice on enforceability.

Frequently asked questions