Hedging a Three-Year Earn-Out Without a Lawyer on the Other Side

The situation

The plan, when Megan first described it to Cameron over coffee, sounded almost simple. Megan owned a mid-sized construction company in Markham that had spent years competing for the same commercial and institutional contracts as a similarly sized firm run by Maricel. Rather than keep bidding against each other, the two had discussed merging their companies into one larger firm, combining crews, equipment, and a bidding history that together would qualify them for larger projects neither could win alone. Cameron, an investment advisor who had managed money for both women for years and had a background structuring transactions before moving into advisory work, agreed to help put the deal together.

The transaction, in the fifty to eighty million dollar range once both companies' assets, contracts, and goodwill were valued together, was structured as a merger of near-equals rather than a straight acquisition, with a portion of the consideration Maricel would receive tied to a three-year earn-out based on the combined company's performance after closing. Earn-outs are common where the parties cannot agree on a single valuation up front, often because one side believes the business will grow faster than the other side is willing to pay for today; the seller accepts a lower amount at closing in exchange for additional payments later, tied to results the combined business actually achieves.

The complication arrived from an unexpected direction. A substantial part of the merged company's post-closing contract pipeline, roughly a third of projected revenue, involved cross-border work for a client based in the United States, invoiced and paid in US dollars. Maricel's earn-out, structured as a percentage of that same revenue stream, would be measured over three years during which the Canadian and US dollar could move meaningfully against each other, and neither side had originally built any protection into the earn-out formula for that risk.

Maricel had also decided, partway through the negotiation, that she did not want to retain her own deal counsel. She had used a lawyer for her company's day-to-day matters for years and trusted him, but he did not do transactional work of this kind, and Maricel felt she understood the business terms well enough to negotiate them herself, with Cameron's team drafting the documents. That decision, reasonable as it seemed to her, changed the entire texture of how the file needed to be run.

The legal question

The first question was mechanical: how should a three-year earn-out tied to revenue in two currencies actually be calculated so that neither side bore currency risk it had not agreed to take on. If the earn-out formula simply converted US-dollar revenue to Canadian dollars at whatever exchange rate applied when each payment was made, Maricel's earn-out could swing significantly larger or smaller than either side intended, based entirely on currency movement that had nothing to do with how well the merged company actually performed. Cameron's original proposal was to hedge the currency exposure through forward contracts locking in an exchange rate for each of the three measurement years, with the cost of the hedge borne by the merged company rather than by Maricel individually, which Maricel had verbally agreed to early on but had not fully understood the mechanics of.

The second question was about how to negotiate fairly and effectively with someone who had chosen not to have counsel review the terms she was agreeing to. A lawyer representing one side of a transaction owes duties to that client, not to the other party, but there are real limits on what can properly be done when the other party is unrepresented. Our office could not give Maricel legal advice, could not let her sign documents she plainly did not understand, and had an obligation to be scrupulously clear that we acted only for Cameron and Megan's side, not for her, even though the tone of the relationship remained collegial throughout.

That created an unusual dynamic. Normally, opposing counsel act as a check on each other, catching ambiguities and pushing back on terms that favour their own client too heavily. Without a lawyer on Maricel's side doing that work, provisions that might otherwise have been flagged and negotiated, including parts of the currency hedge mechanism itself, went unchallenged for longer than they should have, and it eventually fell partly to our own office to make sure Maricel was not agreeing to something plainly unfair to her, even while acting for the other side.

The hedge cost allocation became the sharpest point of disagreement. Once Maricel finally sat down with an accountant she trusted to review the numbers, she pushed back hard on bearing any share of the hedging cost, arguing the currency risk was inherent in the business Cameron and Megan wanted to combine with hers, not something she had created. That was a fair point, and it reopened a term everyone had believed was settled.

What we did

1. Confirmed in writing, repeatedly, that our office acted only for Cameron and Megan’s side, and recommended in writing that Maricel obtain independent legal advice before signing anything, documenting each recommendation and her decision to decline. Repeating the confirmation at each stage, rather than stating it once at the outset, protected the integrity of the process and gave everyone a clear record of what had actually been explained and when.
2. Modelled the currency exposure on the earn-out using several years of historical exchange rate movement between the Canadian and US dollar, showing both sides in concrete numbers, not abstractions, how much the earn-out payments could vary across a plausible range of currency scenarios if left unhedged. Putting real dollar ranges in front of both sides made the abstract risk something they could actually negotiate over.
3. Structured a forward contract hedge covering the US-dollar-linked portion of projected revenue for each of the three measurement years, locking in an exchange rate at the start of each year so the earn-out calculation would not be distorted by currency movement occurring after the rate was set. This gave both sides a formula that measured business performance rather than exchange rate luck.
4. Slowed the process when Maricel raised the hedge cost objection rather than pressing forward on a term she had only partly understood when she first agreed to it. Treating her later, better-informed pushback as a legitimate renegotiation, rather than a reversal to be resisted, was the right call because pressing ahead risked an agreement she could credibly say she never truly understood.
5. Proposed splitting the hedging cost between the merged company and Maricel individually, rather than leaving it entirely on either side, reflecting that both the currency risk and the underlying US contract pipeline were genuinely shared features of the combined business going forward. This compromise gave both sides a formula neither could later argue had been imposed on them unfairly.
6. Recommended Maricel retain an accountant, at minimum, to review the earn-out mechanics even without full transactional counsel, since the currency modelling and hedge cost allocation involved financial judgment she was entitled to have tested by someone working only for her. That recommendation mattered because our office could not fill that role for her while acting for the other side, and leaving the gap unaddressed would have meant nobody was testing the numbers on Maricel’s behalf.
7. Rebuilt the earn-out schedule around the revised cost split, adjusting the base earn-out percentage slightly upward to offset the cost Maricel would now bear, so the economic outcome for her stayed roughly consistent with what she had originally understood she was agreeing to before the hedge cost issue was reopened. This kept the renegotiation from feeling like a net loss to either side.
8. Documented the final terms in plain, thorough language beyond our normal drafting standard, anticipating that the agreement might later be read without a lawyer’s help by someone on Maricel’s side, and building in a straightforward annual reconciliation process either party could follow without specialized assistance. That extra clarity was cheap insurance against a dispute during the three-year earn-out period, when neither side could count on having the same lawyers still involved to interpret an ambiguous clause.
9. Held a joint walkthrough call with Maricel and her accountant once retained, going through the revised earn-out schedule line by line rather than sending a redline and expecting it to be understood on paper. Walking through the numbers together, rather than in writing alone, surfaced two further clarifying questions that were resolved before signing rather than after closing, when they would have been far harder to fix.

The outcome

The merger closed with a hedged earn-out structure that split the currency hedging cost between the combined company and Maricel, roughly in proportion to how the underlying currency risk was shared between the ongoing business and her personal earn-out payments. Neither side got the original position it had proposed. Cameron and Megan's side gave up its initial plan to have the merged company absorb the full hedging cost, and Maricel accepted that she would bear some of that cost herself rather than none of it, which was less than the position she had pushed for once she understood the mechanics.

The unrepresented-party dynamic added real time and caution to a file that would otherwise have moved faster. Several rounds of the negotiation slowed specifically to make sure Maricel had genuinely understood a term before it was finalized, including a full re-explanation of the hedge cost issue once she raised her objection, and the file took roughly two additional months to close compared to Cameron's original timeline. That slower pace, uncomfortable as it was for a board eager to announce the combination, produced an agreement Maricel could actually stand behind rather than one she might later argue she had not understood, or one that unravelled during the first earn-out reconciliation a year into the deal.

Once closed, the merged company began operating under the new name in Markham with both Megan and Maricel involved in leadership, and the first of the three earn-out measurement years began with the hedge already in place, insulating that year's calculation from the currency movement that had prompted the whole renegotiation. Cameron said afterward that structuring the deal was, in the end, less difficult than making sure a friend on the other side of the table understood exactly what she was signing before she signed it, and that the extra months spent on that were, in hindsight, the best insurance the file had against a dispute surfacing later in the earn-out period.

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