Protecting an Earn-Out Before the Ink Dried in Cobourg

The situation

Eleni had spent years as a landscaper before she and two colleagues, Dimitri and Mateo, pooled their savings and took over a small commercial grounds-maintenance operation in Cobourg. Dimitri had come from a factory technician job and brought an eye for scheduling and equipment maintenance that turned a scrappy crew into a company with year-round contracts across the region: mowing and planting in summer, snow and ice control in winter. Fifteen years later, the business employed dozens of people and generated enough steady, recurring revenue that a national facilities-services group came calling.

The buyer's opening offer valued the company at roughly $11.5 million: about $8 million in cash at closing, with the remaining $3.5 million payable over two years as an earn-out, a portion of the purchase price that is only paid if the business hits agreed financial targets after the sale closes. Earn-outs are common when a buyer wants to bridge a gap between what a seller thinks the business is worth and what the buyer is willing to pay up front, especially when the business depends heavily on relationships and know-how the sellers hold personally. Eleni, Dimitri, and Mateo were being asked to stay on and run daily operations for two more years, with roughly a third of their total payout riding on how well the business performed under a new owner's broader corporate structure.

What the review found

The buyer's lawyers had produced a purchase agreement with an earn-out formula that looked reasonable on its face: a target level of earnings before interest, taxes, depreciation and amortization (EBITDA), a sliding scale of payout based on how close the business came to that target, and a calculation to be prepared by the buyer's own accounting team. What the draft did not contain was any meaningful restriction on how the buyer could run the business during the two years that mattered most.

That gap was the real risk. Once the sale closed, the founders would no longer own the company or sit on its board. The buyer would control the budget, the staffing levels, the equipment purchases, and critically, the corporate overhead charges allocated down to the Cobourg operation from head office. A buyer under no obligation to maintain marketing spend, keep the business as a standalone unit for reporting purposes, or refrain from folding it into a larger regional division could, intentionally or not, suppress the very EBITDA number the earn-out depended on. None of that would be bad faith in any obvious sense. It could simply be normal post-acquisition cost-cutting that happened to land hardest on the two years the sellers still had money riding on.

There was a second issue tucked inside the accounting mechanics. The draft gave the buyer sole authority to calculate EBITDA for earn-out purposes, with the sellers entitled only to review the finished number after the fact. Without a defined methodology, agreed accounting policies, and a right to see the underlying books as they were generated, a dispute over the final figure would arrive too late to do much good — the two years would already be over.

A third wrinkle came from how the buyer planned to integrate the business. The founders learned in a management call, almost in passing, that head office intended to route the Cobourg operation's equipment purchases and payroll processing through a shared regional service centre once the deal closed. That kind of shared-services arrangement is common after an acquisition and often makes sense operationally, but it also meant costs the business had never carried before — allocated overhead from functions it did not control — could show up on its books during the very period the earn-out depended on. None of that had been priced into the target EBITDA figure the parties had negotiated, and the draft agreement said nothing about how such allocations would be treated if they arrived.

What we did

1. Rewrote the EBITDA definition with specificity. We replaced the open-ended reference to "EBITDA calculated in the buyer's discretion" with a defined methodology fixed to the accounting policies the business had used historically, with named exclusions for one-time integration costs and corporate overhead allocations unrelated to the Cobourg operation.
2. Negotiated affirmative operating covenants. The agreement was amended to require the buyer to operate the business substantially in the ordinary course during the earn-out period, maintain marketing and equipment reinvestment at levels consistent with historical practice, and refrain from merging the business into another division in a way that would make its results impossible to isolate.
3. Added information and audit rights. Eleni, Dimitri, and Mateo secured the right to receive monthly financial statements during the earn-out period and to engage an independent accountant, at their own expense, to review the buyer's books if a dispute arose over the calculation — rather than waiting until the end of the two years to find out the number was wrong.
4. Built in a dispute resolution mechanism. Rather than leaving disagreements to spill into litigation, the agreement set out a defined process: informal negotiation first, then referral of any unresolved accounting dispute to an independent accounting firm whose determination would be binding on the narrow question of the number itself.
5. Protected the founders' operating authority. Because all three intended to keep running the business day to day, we negotiated a provision giving them meaningful input on the annual operating budget for the Cobourg business during the earn-out term, so the people whose compensation depended on results also had a voice in the spending decisions that drove them.
6. Addressed what happened on early departure or sale. A clause was added to protect the earn-out if the buyer resold the business or terminated one of the founders without cause during the two-year period, so the contingent payment could not be quietly avoided by a change of ownership structure.

The outcome

The buyer pushed back on some of the language, particularly the audit rights and the restriction on merging the business into a broader regional division, but agreed to the substance of every point after several rounds of negotiation over roughly six weeks. The deal closed with the operating covenants intact.

Over the following two years, the business largely performed as it had before the sale, helped by the fact that the new owner kept marketing spend and staffing levels close to historical norms, exactly as the agreement required. When the first-year earn-out calculation came in slightly under target, the defined methodology meant Eleni, Dimitri, and Mateo could see precisely why, review the underlying figures under their audit right, and confirm the shortfall reflected a genuine dip in winter contract volume rather than an accounting choice made against them. They accepted that year's reduced payout without dispute because they could see it was accurate. The second year met target in full. Across both years, the three founders collected close to the full $3.5 million in contingent payments, on top of the roughly $8 million received at closing.

None of that outcome depended on the buyer acting generously. It depended on the contract making generosity unnecessary — the covenants meant the business had to be run in a way that gave the earn-out a fair chance to succeed, regardless of what the buyer might otherwise have preferred to do with its new acquisition.

What you can learn from this