Earn-Out Disputes When the Business Underperforms After an Ontario Sale

An earn-out sounds simple on paper: part of the purchase price gets paid later, based on how the business performs after closing. In practice, it hands the seller's remaining payout to someone else's decisions. When the numbers come in low, the seller's question is always the same — did the business genuinely underperform, or did the buyer's choices cause it to miss?

That distinction is the entire dispute, and how it gets resolved usually comes down to what the purchase agreement actually says.

Why Earn-Outs Create Built-In Tension

Once the deal closes, the buyer runs the business — pricing, staffing, marketing spend, product mix, which customers to prioritize. The seller, meanwhile, is still financially exposed to how those decisions play out, often without any say in making them. Even a buyer acting in complete good faith can run the business differently than the seller would have, and "differently" can easily mean the negotiated targets aren't hit.

That tension doesn't mean every missed earn-out is a dispute waiting to happen — but it explains why earn-outs are one of the more common sources of post-closing conflict in Ontario business sales.

Common Triggers for a Dispute

• The buyer changes pricing, product lines, or service offerings in ways that depress the metrics the earn-out is measured against
• The buyer diverts customers, referrals, or resources to another part of its business
• Disagreement over accounting methods used to calculate the earn-out metric (revenue recognition, allocated costs, one-time items)
• Ambiguity in how the purchase agreement actually defines the target or the measurement period
• The buyer integrates the acquired business so heavily into its own operations that isolating its standalone performance becomes genuinely difficult

What the Purchase Agreement Usually Says About This

Purchase agreements with an earn-out typically don't leave the calculation entirely to trust. They usually specify:

• How the metric is calculated — often referencing defined accounting terms and a specified methodology
• Who prepares the calculation — commonly the buyer, with the seller given a right to review and object
• A dispute-resolution mechanism for genuine disagreements — commonly referral of financial disputes to an independent accountant, or arbitration or litigation for broader disputes
• Sometimes, operating covenants limiting how the buyer may run the business during the earn-out period — for example, restrictions on materially changing pricing or diverting business away from the acquired operation

Whether any of this exists — and how strong it is — depends entirely on the specific agreement you signed. This is one reason earn-out clauses deserve real negotiation attention at the time of drafting, not just at the time of dispute.

Covenants That Can Help a Seller

Where a seller anticipated this risk and negotiated for it, the purchase agreement may include covenants requiring the buyer to operate the business in good faith, in the ordinary course, or without taking actions specifically intended to reduce the earn-out payment. These covenants give a seller something concrete to point to if the buyer's conduct — not just market conditions — caused the shortfall. Without them, a seller is often left arguing good faith and fair dealing in more general terms, which is a harder case to make.

Steps a Seller Can Take When Targets Are Missed

1. Go back to the actual agreement wording before assuming anything — the definitions of the earn-out metric, the measurement period, and any operating covenants control the analysis, not what feels fair.
2. Gather evidence of the buyer's post-closing decisions — pricing changes, staffing changes, diverted customers or contracts, and how they correlate with the shortfall.
3. Request the underlying calculation and supporting records the agreement entitles you to review.
4. Raise the dispute formally and promptly — many agreements set deadlines for objecting to a proposed earn-out calculation, and missing them can weaken or waive your position.
5. Use the agreed dispute-resolution mechanism — an independent accountant referral for calculation disputes, or arbitration/litigation where the agreement calls for it or where the dispute goes beyond pure accounting.
6. Consider negotiation before escalating — earn-out disputes are often resolved commercially (a partial payment, a revised structure, or a lump-sum settlement) faster and more cheaply than through formal proceedings.

Frequently asked questions