Earn-Out Style Partner Buyouts in Ontario: How They Work

Most partner buyouts involve a fixed price, paid in full or over a defined schedule. But sometimes the partners genuinely can't agree on what the business is worth — or the remaining partner can't afford a fixed price upfront — and an earn-out style partner buyout becomes the compromise: some of the payment to the departing partner depends on how the business actually performs after they leave.

This structure can bridge real gaps, but it also creates an ongoing financial relationship between people who are supposed to be parting ways. This article explains how earn-out buyouts generally work and where they tend to cause the most trouble.

What an Earn-Out Buyout Looks Like

In an earn-out structure, the departing partner receives a base payment at closing (sometimes) plus additional payments over a following period, calculated against a defined performance measure — revenue, profit, a specific client's continued business, or another metric set out in the agreement. The idea is straightforward: if the business does well after the buyout, the departing partner shares in some of that upside; if it doesn't, they receive less than they might have under a fixed price.

Why a Departing Partner Might Agree to One

• Bridging a valuation gap. If the partners can't agree on a fixed number, an earn-out lets both sides be partly right — a lower guaranteed amount plus a share of future performance.
• Making the deal affordable. A remaining partner who can't finance a full fixed price upfront may only be able to close the deal by deferring part of the payment to an earn-out.
• Confidence in the business's trajectory. A departing partner who genuinely believes the business will do well without them may prefer to keep some upside exposure rather than accept a lower fixed price today.

The Risks for the Departing Partner

• [ ] Payment now depends on decisions made by people who no longer answer to you
• [ ] The remaining partner(s) control spending, growth investment, and reporting that determine the earn-out calculation
• [ ] A slower year — for reasons entirely outside your control — can reduce or eliminate the payment
• [ ] Disputes over how the performance metric is calculated are common and can be expensive to resolve
• [ ] Collecting on an unpaid earn-out can mean pursuing a business you no longer have any visibility into

The Risks for the Remaining Partner

An earn-out doesn't just create risk for the person leaving. The remaining partner may face:

• Ongoing reporting and disclosure obligations to someone no longer involved in the business
• Restrictions on major decisions (financing, acquisitions, changes in direction) that could affect the earn-out calculation
• A former partner second-guessing legitimate business decisions if they reduce the payout
• The administrative burden of tracking and reporting the metric accurately, potentially for years

What a Well-Drafted Earn-Out Clause Addresses

A poorly drafted earn-out clause is one of the most common sources of post-closing disputes in any business transaction, and a partner buyout is no exception. The agreement should clearly define:

1. The exact metric being measured, and how it's calculated
2. The measurement period and how often it's reported
3. What controls the remaining partner has and doesn't have over decisions that affect the metric
4. The departing partner's access to records needed to verify the calculation
5. How disagreements over the calculation get resolved — for example, referral to an independent accountant rather than straight to litigation

Frequently asked questions