When an Earn-Out Dispute Went to the Accountant, Not Court

The situation

A regional healthcare consolidator had spent two years building a platform of walk-in clinics and attached pharmacies across the GTA. Its deal team was small and specialized: Amina, a pharmacist by training who had moved into clinical operations and vetted every acquisition target's dispensing volumes and patient roster, and Hodan, a former construction project manager who now ran post-closing integration, including the physical build-outs needed to bring an acquired clinic up to the consolidator's standard layout. Between them they had closed four acquisitions. The fifth, a group of clinics in Georgina owned by their founder, Beth, was the largest yet — a transaction in the $30 to 50 million range.

The deal closed with roughly $34 million paid at closing and up to $6 million more available as an earn-out, split across two annual instalments tied to the clinic group hitting agreed EBITDA (earnings before interest, tax, depreciation and amortization — a standard measure of a business's underlying operating profit) targets in each of the two years after closing. Earn-outs like this bridge a valuation gap: the buyer is not fully convinced the business will perform as projected, the seller is convinced it will, and the earn-out lets both be right on their own terms. The first year's target was met without argument and the consolidator paid Beth the full $3 million instalment on schedule.

What the review found

The second year was different. Under the purchase agreement, the acquired clinic group had to be operated as a reasonably standalone business during the earn-out period, with its own management accounts, so that EBITDA could be measured cleanly against the business as it existed at closing. Hodan's integration work complicated that. Partway through the second year, the consolidator closed one underperforming site within the group and folded its patient volume into a nearby location, and it began allocating a share of shared corporate overhead — back-office, purchasing, compliance — to the clinic group's books for the first time.

When Amina's team ran the year-two numbers, EBITDA came in below the target, triggering no payment. Beth's position was that the clinic group had, in substance, hit the target: patient volumes and revenue were up, and the shortfall existed only because of overhead allocations and a site closure that were the consolidator's decisions, not reflections of the business's real performance. She raised a dispute under the purchase agreement rather than simply accepting the calculation, and the sides could not agree between themselves. Left alone, that kind of disagreement typically heads toward litigation over contract interpretation — expensive, slow, and corrosive to a relationship the consolidator still needed, since Beth remained a minority shareholder and a working clinical director. The purchase agreement had anticipated exactly this. It included a mechanism requiring the parties to jointly retain an independent accounting firm — one with no prior relationship to either side — to determine any unresolved earn-out calculation dispute, with that determination binding on both parties except in cases of manifest error.

What we did

1. Reviewed the earn-out mechanics before taking a position. Our team read the EBITDA definition and the operating covenants in the purchase agreement line by line, including the provisions on overhead allocation and material changes to the business during the earn-out period. The agreement permitted reasonable allocation of shared costs but required any allocation methodology to be consistent with how the consolidator treated its other clinic locations — a detail that mattered once the dispute reached the accountant.
2. Assembled the record the independent accountant would need. Rather than argue the dispute in the abstract, we worked with Amina and Hodan to document exactly what had changed at the Georgina clinics during year two: the overhead allocation methodology applied elsewhere in the consolidator's network, the commercial rationale for the site closure, and the patient volumes that had transferred rather than disappeared. A dispute resolved on paper by an accountant turns on the quality of the underlying financial record, not on advocacy.
3. Jointly selected the independent accountant. The purchase agreement allowed the parties to agree on a firm or, failing agreement, have one appointed through a professional accounting body. We negotiated the engagement terms with Beth's counsel — scope, the information both sides would produce, and a timeline — so the process moved without a second layer of dispute over how the dispute itself would run.
4. Made submissions on the EBITDA definition, not just the numbers. The overhead allocation question was ultimately one of contract interpretation before it was arithmetic: did the agreement's language permit the consolidator to apply its standard allocation methodology to a business it had only just integrated? We made that argument in writing to the accountant, alongside the underlying figures, because a binding determination follows the contract's wording, not general fairness.
5. Advised on settlement value throughout. Before the accountant's determination came back, we gave Amina and Hodan a realistic range of outcomes based on how the EBITDA definition read and how comparable overhead disputes are typically resolved, so the consolidator's board was not blindsided by a number that fell short of a full win.

The outcome

The independent accountant's determination split the difference, though not evenly. It accepted that the consolidator was entitled to allocate overhead using its standard network-wide methodology, which reduced the clinic group's measured EBITDA. But it also found that the site closure's costs had been allocated in a way that was not consistent with how the consolidator treated closures elsewhere, and adjusted the calculation to correct that inconsistency. The result was an EBITDA figure that still fell short of the full year-two target but cleared a lower threshold in the earn-out formula, entitling Beth to a partial payment of roughly $1.8 million — about 60 percent of the $3 million instalment she had originally claimed, and well above the zero the consolidator's initial calculation had produced.

Neither side got what it first argued for. The consolidator paid out more than it believed the year's actual performance justified; Beth accepted less than the number she believed reflected the clinics' true growth. But the determination was binding, arrived at in about four months rather than the year or more a lawsuit would likely have taken, and it did not require Beth and the consolidator to litigate against each other while she was still running the clinics day to day as their clinical director. The parties split the accountant's fees as the engagement letter specified, each absorbed their own legal costs, and the working relationship survived the dispute — which mattered more to Amina's team than winning the argument outright, since two further acquisitions using the same earn-out structure were already in planning.

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