When Two Accounting Standards Turned One Earn-Out Into Two Numbers

The situation

The call came in on a Tuesday afternoon, and it was Min-ji who made it, not Jamal. Min-ji had been running the parent company's day-to-day operations for a few years by then, ever since Jamal, the company's founder, had stepped back from active management after selling several other ventures over his career. Jamal still held control of the holding company and still made the calls that mattered, but he had asked Min-ji to bring in outside counsel to look at a letter of intent that had landed that week from a US industrial buyer.

The holding company, based in Paris, Ontario, ran three unrelated divisions. One of them, an industrial coatings operation, had drawn interest from a mid-sized American manufacturer looking to add Canadian production capacity. The buyer's offer was straightforward on its face: a purchase price in the mid range of the deal, paid partly at closing and partly as an earn-out tied to the division's performance over the two years following the sale. For a division that had been growing steadily, an earn-out structure made sense to Jamal. It let him capture some of the upside from growth he expected to continue, while giving the buyer comfort that it was not overpaying for growth that might not materialize.

What concerned Min-ji, reading through the letter of intent, was how thin the earn-out language was. It referred to the division hitting certain earnings targets without saying, in any detail, whose accounting rules would be used to measure those earnings. Min-ji had spent part of an earlier career in a technology company with US operations and had seen, firsthand, how differently the same set of financial results could look depending on which country's accounting standards were applied to them.

Jamal, on the first call with our office, put it simply: he did not want to spend the next two years arguing about numbers with a buyer he had just handed control of the division to. He wanted the earn-out written so tightly that there was nothing left to argue about. That instinct turned out to be only half right, and the way the file actually unfolded had less to do with tight drafting than with a decision the buyer's own team made early on.

The problem

Canadian private companies generally report under a made-in-Canada standard, Accounting Standards for Private Enterprises, while the US buyer's finance team worked exclusively in US generally accepted accounting principles. The two frameworks agree on most things, but they diverge in places that matter enormously to an earn-out: when revenue on a long-term contract gets recognized, how certain deferred costs get treated, and how inventory is valued when it moves between related entities after a sale. None of those differences show up as a rounding error. On a division doing tens of millions in annual revenue, they can shift reported earnings by a meaningful percentage in either direction.

Silence on which standard applies, or borrowing one side's standard without adjustment, hands the party preparing the numbers a great deal of practical control over the target it is being measured against, though not a free hand: Ontario law requires a contractual discretion of that kind to be exercised honestly and for the purpose it was given, so a buyer whose choices distort the measurement can be challenged on that basis. That practical control is what had landed with the buyer here, though not through any oversight on Jamal's side. Early in negotiations, before our office was retained, the buyer's deal team had insisted on drafting the earn-out mechanics itself, citing time pressure and its own familiarity with the metric. Jamal's advisors at the time, eager to keep the deal moving, let that draft stand largely unchanged. It defined the earnings target using the buyer's own US GAAP-based calculation, prepared by the buyer's own accounting team, with no carve-out for the revenue-recognition timing differences that would apply once the division's contracts were reported under a Canadian lens.

On paper, that looked like a problem for Jamal. If the buyer controlled both the accounting standard and the calculation, the earn-out could be quietly minimized simply by how figures were classified in year one and year two. Revenue that would have counted toward the earn-out under the division's historical Canadian reporting could be pushed into a later period under US timing rules, missing the earn-out window entirely.

But the buyer's insistence on using its own definition, drafted by its own team, cut the other way once the deal closed. One-sided drafting helped Jamal's side, but it did not settle the point outright. An Ontario court reads a clause on its own words in the context of the whole agreement, and only where a real ambiguity survives that reading does it get resolved against the party that drafted it, a last resort rather than a bar on the buyer advancing its own reading. What the buyer plainly could not do was swap in some other, friendlier standard than the one its own clause named, just because the numbers came in lower than it wanted.

What we did

1. Reconstructed the earn-out mechanics from the buyer's own draft. Before advising Jamal on anything, we mapped exactly how the buyer's clause defined earnings, line by line, and compared that definition against how the division's contracts had historically been recognized under Canadian accounting. This told us precisely where the gap between the two standards would show up in the numbers, rather than leaving it as a vague concern.
2. Flagged the risk to Jamal and Min-ji before signing, not after. We explained plainly that the buyer's draft, left as written, would let the buyer's own accountants decide the earn-out outcome using rules that did not match how the division had always tracked its performance. Jamal chose to proceed with the deal on this basis rather than reopen the whole negotiation, but he did so with full knowledge of the exposure.
3. Negotiated a narrow but critical fix: an audit right. Rather than trying to rewrite the buyer's accounting definition, which the buyer's team resisted reopening, we secured Jamal's contractual right to have an independent accountant review the buyer's earn-out calculations each year, with access to the underlying division records. This preserved the buyer's preferred structure while giving Jamal a way to check the buyer's math.
4. Built a monitoring calendar tied to the division's reporting cycle. We set concrete dates for when the buyer was contractually required to deliver its earn-out calculations, and paired each date with a short window for Jamal's team to request the audit. Missing these windows would have forfeited the right entirely, so we made sure Min-ji's finance staff tracked them from day one.
5. Exercised the audit right when year-one numbers came in low. When the first earn-out calculation arrived showing the division missing its target by a wide margin, we retained Ji-ho, an independent accountant with cross-border experience, to review the buyer's work against the division's actual contract performance, using the buyer's own accounting definition as the yardstick rather than a Canadian standard the buyer had never agreed to. Ji-ho's mandate was narrow: test the buyer's arithmetic against its own stated rules, not relitigate which country's framework should have applied.
6. Demonstrated the buyer had misapplied its own standard. Ji-ho's review found that the buyer's finance team had deferred a block of revenue from long-term contracts into a later reporting period, using an internal policy that was not, in fact, required by the earn-out clause's own wording and had never been applied to the division's contracts before the sale. We compiled the discrepancy into a detailed reconciliation, tracing each deferred dollar back to the contract and delivery date the buyer's own policy said should have counted.
7. Pressed the point using the buyer's own drafting against it. Because the buyer had insisted on writing the clause itself and had refused to let our side soften or generalize the language, the buyer had no room to argue for a looser reading once its own numbers were shown to depart from its own words. We made that argument directly, in writing, before any formal dispute process was needed.

The outcome

The buyer's finance team, faced with a reconciliation that traced the discrepancy back to its own accounting policy rather than any ambiguity in the contract, recalculated the year-one earn-out without further argument. Jamal received the full amount the division's actual performance had earned, roughly in line with what the division would have shown under its historical Canadian reporting, once the misapplied revenue deferral was corrected. No formal dispute process was ever opened; the reconciliation itself was enough to settle the point, in part because it left the buyer's own accounting team little room to defend a position that contradicted its own stated methodology.

The second year of the earn-out period proceeded without incident. Having seen that Jamal's side was actively reviewing the numbers each year, and that the review had already caught one departure from the buyer's own policy, the buyer's finance team applied its accounting definition more carefully the second time around. The year-two calculation matched Min-ji's internal projections closely enough that no formal audit challenge was needed, and payment followed on the schedule set out in the purchase agreement.

Across the full two-year earn-out window, Jamal ultimately collected the entire contingent payment contemplated by the deal, on top of the amount paid at closing, with no reduction traceable to accounting timing differences. The division continued operating under the buyer's ownership largely as it had before, and Min-ji, whose read of the letter of intent had prompted the first call to our office, stayed on for a transition period to help the buyer integrate its reporting.

What made the file work was not a perfectly drafted earn-out clause, since the clause itself was never rewritten to Jamal's preference. It was recognizing, before the deal closed, that language drafted entirely by one party under that party's own accounting rules could still be enforced strictly against that party later, provided the other side kept a real, time-bound right to check the arithmetic. Jamal never needed to win an argument about which accounting standard was fairer. He only needed the buyer to follow the standard the buyer itself had chosen to write into the contract, and a mechanism ready to prove it when the buyer initially did not.

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