The earn-out formula that never mentioned the exchange rate

The situation

Jerome had built a group of businesses over fifteen years without ever buying another company outright. He owned several multi-unit franchise locations across the north, had grown them from a single site into a regional operation, and had reached the point where an acquisition made more sense than building organically. The target was a smaller, well-run company with complementary operations, owned by a couple, Mona and Wael, who were ready to step back after building it themselves. Wael had spent years as a partner in an engineering firm before the couple started the business together, and the technical discipline from that earlier career had shaped how carefully the company's own contracts and supply arrangements were normally drafted, which made the gap in the earn-out clause all the more surprising to him once it surfaced. The deal, once agreed, sat in the fifty to eighty million dollar range, with a portion of the price structured as an earn-out tied to the acquired business hitting revenue targets over the two years after closing.

The earn-out existed because Jerome, sensibly for a first-time buyer, did not want to pay full price up front for growth that had not yet happened. Mona and Wael, just as sensibly, wanted credit for the growth they believed the business would deliver once it had Jerome's resources behind it. The compromise, a base purchase price plus contingent payments tied to performance, is common in acquisitions and had seemed straightforward when everyone signed. Part of the underlying business had cross-border supply contracts priced in United States dollars, and the earn-out formula referenced revenue figures that ran through those contracts.

Eighteen months after closing, the exchange rate had moved meaningfully from where it sat at signing. The business had, by most measures, performed reasonably well. But when the first earn-out calculation came due, Mona and Wael's advisor produced a number well below what they had expected, and Jerome's own finance team produced a different number using what they believed was the same formula. Both sides were reading the same clause in the purchase agreement and arriving at materially different figures, and neither side could explain confidently why.

Mona and Wael, already unhappy that their expected payment had shrunk, suspected the discrepancy was deliberate. Jerome, new to this kind of dispute and anxious not to damage a relationship he still needed for a smooth transition, did not know whether his own team's number was even right. He came to us not looking for a negotiating strategy but for someone to actually work out, from the document itself, what was owed, and he was clear from the first meeting that he did not want a court fight with people he was still relying on to run the business day to day.

What made the situation harder was timing. The transition period had a second earn-out measurement due the following year, and Mona and Wael were still contractually involved in operating the business during that window. A drawn-out dispute over the first payment risked poisoning that working relationship before the second, larger measurement even arrived, which gave everyone a practical reason to want this resolved quickly and on terms that would not simply repeat themselves twelve months later.

What the documents showed

The purchase agreement's earn-out clause had been drafted competently in isolation but without enough attention to the business's cross-border revenue. It defined the earn-out target by reference to the company's annual revenue as reported in its financial statements, and it defined those financial statements as being prepared in Canadian dollars, consistent with the company's normal accounting practice. That part was clear. What was not clear was how revenue originally earned or billed in United States dollars, under the supply contracts that made up a meaningful share of the business, was supposed to be converted for the purpose of that calculation.

Mona and Wael's advisor had converted the relevant contracts using the exchange rate in effect on the date each invoice was issued throughout the year, which produced a blended rate close to what the business had actually experienced in cash terms. Jerome's finance team, working from the same underlying figures, had instead applied a single year-end exchange rate to the full annual total, which is a common and defensible accounting convention but produced a noticeably different number given how much the rate had moved over the period in question. Neither approach was unreasonable as an accounting matter. The agreement simply never said which one governed, because whoever drafted it had not turned their mind to the fact that a meaningful share of the business's revenue was not earned in Canadian dollars at all.

This is a common gap in earn-outs attached to a business with any cross-border revenue, and it is rarely caught until the first payment comes due, because at signing everyone is focused on the target itself rather than the mechanics of measuring it. A dollar figure in a contract looks precise. It only becomes clear that precision was never actually defined once two competent people apply two different conventional readings and land on two different answers.

The dispute, once we worked through it, was genuinely not about anyone acting in bad faith. Both calculations were internally consistent and defensible as accounting choices. The agreement itself, not either party's intentions, was the actual source of the disagreement, which mattered because it meant the fix did not require rebuilding trust between two people who had negotiated in good faith. It required reading the document more carefully than either side's finance team had, and being honest with both sides about what it did and did not say.

What we did

1. Read the full earn-out mechanism against the underlying financial statements rather than relying on either side's summary of the dispute, since a currency disagreement this specific could only be resolved by tracing exactly which figures the clause referenced and how those figures were actually produced by the company's accounting system, line by line, rather than by trusting either side's headline number.
2. Identified the precise gap in the drafting: the agreement specified the currency of the resulting financial statements but never specified the conversion methodology for revenue originally earned in a different currency, which meant neither side's approach was technically wrong so much as the document was genuinely silent on the question that mattered most once the exchange rate moved against Mona and Wael's expectations.
3. Reviewed the negotiation record and drafting history for any indication of what the parties had actually intended at signing, including earlier drafts, term sheets and correspondence between the deal teams, to see whether extrinsic evidence supported one conversion method over the other before treating the gap as genuinely open to either reading. The earlier drafts turned out to be silent on currency too, which confirmed the gap was an oversight rather than a deliberate choice either side could now claim.
4. Assessed how a court or arbitrator would likely approach the ambiguity if the dispute were not resolved by agreement, since understanding the realistic downside for each side, given how earn-out ambiguities are typically interpreted against the party who drafted the clause, gave both Jerome and Mona and Wael's advisor a grounded basis for compromise rather than an argument each side could plausibly believe it would win outright.
5. Convened a direct conversation between Jerome and Mona and Wael, outside their advisors, once the range of realistic outcomes was clear, because the actual breakthrough in this dispute came from the two sides agreeing on a practical number they could both live with, not from either side conceding a legal argument. Removing the advisors from that specific conversation, after each side already understood the legal range, let Jerome and the couple speak plainly rather than through positions drafted for them.
6. Translated that practical agreement into a defined conversion methodology, using a specified average rate over the measurement period rather than either a transaction-date or a year-end approach, so the number Jerome and Mona and Wael had already agreed to in principle had a defensible mechanical basis behind it rather than sitting as an informal handshake that could be disputed again later.
7. Calculated the first earn-out payment under the new methodology and confirmed it matched what Jerome and Mona and Wael had already agreed between themselves, closing the gap between the business conversation and the legal document rather than reopening it. Running the new formula against both sides' original figures also confirmed neither finance team's underlying accounting had been wrong, only the assumption about which convention the contract required.
8. Amended the purchase agreement to lock in the conversion methodology for the remaining earn-out period, protecting the practical agreement the parties had reached by giving it binding, unambiguous contractual force, so the same dispute could not recur at the next measurement date regardless of where the exchange rate moved next, and so neither finance team would need to revisit the question under pressure a second time.

The outcome

The first earn-out payment was resolved using the defined conversion methodology, landing closer to Mona and Wael's original expectation than to Jerome's finance team's initial calculation, though below what Mona and Wael had hoped for before the exchange rate moved against them. Jerome paid what the corrected reading of the agreement actually supported, and both sides accepted the outcome because it matched a figure they had already agreed to directly, with the legal analysis confirming rather than dictating the number.

The amendment locking in the conversion methodology mattered as much as the payment itself, since it meant the second and final earn-out measurement, due the following year, would not reopen the same argument at a moment when Mona and Wael were still contractually involved in operating the business. Jerome's team and Mona and Wael's advisor both now had a clear, agreed formula to apply regardless of where the exchange rate moved next, which removed a recurring source of tension from a relationship that needed to stay workable through the remainder of the transition.

What resolved the dispute was ultimately a conversation between Jerome and Mona and Wael themselves, once each understood the realistic legal range they were arguing within. The role of the legal work was not to win that conversation for either side but to give it a solid floor, and then to convert what the two of them agreed to informally into contract language specific enough that it could not unravel later. For Jerome, the practical lesson from his first acquisition was that an earn-out is only as reliable as its measurement mechanics, and that a business with any cross-border revenue needs those mechanics specified in detail at signing, not worked out under pressure after a dispute forces the question. Mona and Wael, for their part, kept a buyer they still had to work alongside for another year, without the dispute hardening into the kind of grievance that would have made that year miserable for everyone involved.

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