Preventing an Earnings Dispute From Becoming Litigation

The situation

Iryna, a professional engineer who had moved into an operating role for a private equity-backed buyer, was leading the acquisition of a mid-sized Toronto engineering and construction firm. The target built and maintained infrastructure for industrial clients across the GTA, and the platform company Iryna worked for wanted it as a bolt-on to an existing portfolio business. Abdi, a construction project manager on the same team, was handling operational due diligence — walking job sites, reviewing project backlogs, and sitting in on management interviews with the seller, Franco, who had built the firm over two decades.

The deal was sized around $38 million, funded through a mix of the buyer's equity and acquisition debt. Treadstone Law was retained not just to draft documents but to run the deal team itself — coordinating the buyer's corporate lawyers, tax advisors, financial due diligence accountants, and lender's counsel so that Iryna and Abdi could stay focused on integration planning rather than chasing down which advisor owed which document. That coordinating role turned out to matter more than anyone expected, because the most consequential issue in the deal was not a missing contract or an environmental flag. It was four words buried in the definitions section of the draft share purchase agreement: "normalized EBITDA of the business."

The gap we found

EBITDA — earnings before interest, taxes, depreciation and amortization — is the standard measure buyers use to price a business, because it strips out financing and accounting choices to show how much cash the operations actually generate. "Normalized" EBITDA goes a step further: it adjusts that number for one-time or non-recurring items, so a bad year caused by a single lawsuit, or a good year inflated by a one-off insurance payout, does not distort the price. The trouble is that "non-recurring" is a judgment call, and every dollar of disagreement about it moves the purchase price.

In this deal, part of the $38 million purchase price was payable at closing, with roughly $3 million held back in an escrow account, to be released to Franco once the final, audited normalized EBITDA figure was confirmed after closing. The draft agreement Franco's counsel proposed defined normalized EBITDA in one short paragraph, with a non-exhaustive list of adjustments and no real mechanism for what would happen if the buyer's accountants and the seller's accountants simply disagreed on the number. It said only that the parties would "negotiate in good faith" to resolve any dispute.

That language looks harmless on a first read. It is not. Franco's business carried several items that were genuinely arguable: a write-off on specialized equipment that might or might not recur, discretionary compensation Franco had paid himself above market rate, and legal costs from a dispute with a former supplier. Depending on how those were characterized, the normalized EBITDA figure could swing by hundreds of thousands of dollars — and with no defined process to break a deadlock, an unresolved disagreement over that figure had only two real endings: one side capitulating under pressure, or the parties ending up in court arguing about accounting judgment calls a judge has no particular expertise to referee. Litigation over financial statement interpretation is slow, expensive, and a poor fit for the courtroom. We flagged this to Iryna and Abdi before the agreement was signed, not after a dispute had already started, which is what let us fix it while it was still cheap to fix.

What we did

1. Rewrote the normalized EBITDA definition with itemized categories. Instead of a general adjustment clause, we negotiated a schedule listing specific addback categories — one-time legal costs, non-recurring equipment write-offs, above-market owner compensation calculated against a defined benchmark — each with its own rule for how it would be calculated and evidenced.
2. Built in a binding neutral accountant mechanism. We replaced the "negotiate in good faith" language with a defined process: if the parties could not agree within a set number of days after the buyer delivered its closing calculations, either side could refer the dispute to an independent chartered professional accountant, agreed on by both parties or appointed by a professional accounting body if they could not agree on who. That accountant's determination would be final and binding on the disputed items only.
3. Set a realistic timeline and cost-sharing rule. The clause required the neutral accountant to issue a decision within a fixed number of weeks of appointment, and split that accountant's fees based on how close each side's position came to the final number — which discourages both sides from taking extreme opening positions, since staking out an unreasonable number costs money if the accountant lands closer to the other side.
4. Coordinated the buyer's own accountants early. As deal team lead, we made sure the buyer's financial due diligence accountants understood exactly how the normalized EBITDA definition would be applied, so their post-closing calculation would be built on the same categories the agreement actually used — rather than producing a number the seller's team could dismiss as inconsistent with the contract.
5. Kept the escrow mechanics tied to the outcome. We confirmed the escrow agent instructions matched the purchase agreement exactly, so that once a final number was determined — whether by agreement or by the neutral accountant — funds would release automatically without a second negotiation over the mechanics of payment.

The outcome

The deal closed on schedule. Six months later, exactly the dispute we had anticipated arrived. The buyer's accountants calculated normalized EBITDA at roughly $5.4 million; Franco's team, using more generous addbacks for the equipment write-off and a larger portion of his prior compensation, calculated about $6.1 million — a gap of roughly $700,000. Under the agreement's terms, that gap determined how much of the $3 million escrow would flow to Franco versus back to the buyer.

Because the mechanism was already built into the agreement, neither side needed to escalate. Both parties exchanged their calculations within the required window, could not bridge the gap through direct negotiation, and jointly appointed a neutral chartered professional accountant within about two weeks. That accountant reviewed both submissions against the itemized schedule, accepted part of each side's position, and landed on a normalized EBITDA figure of roughly $5.75 million. The result was a $350,000 adjustment in the buyer's favour out of the escrow, with the balance released to Franco roughly ten weeks after the process began — a fraction of the time, cost, and relationship damage a lawsuit would have caused.

Franco's counsel later told us the clause was the reason the dispute stayed a math exercise instead of a legal fight. That is the outcome we were aiming for from the start: not a dispute avoided by luck, but a dispute made survivable because the mechanism to resolve it was negotiated and drafted properly before either side had a stake in a particular number. The fight over the money still happened. The fight over how to fight about the money never did.

What you can learn from this