When an Earn-Out Dispute Landed on the Accountant's Desk

The situation

Ming had started as a personal support worker, building a private roster of elderly clients who needed help with daily living. Rohan had run a hairdressing chair for a decade, doing house calls for clients who could no longer travel to a salon. When the two of them started referring clients to each other, they realized there was a business in it: a single company offering personal care, light housekeeping, and mobility support to seniors aging in place. Within eight years they had built it into a company with several dozen staff and contracts across the region.

The acquisition target was a smaller, complementary competitor run by a sole owner named Nikhil, who had built a loyal client base but was ready to retire. Ming and Rohan's company agreed to buy the business for a price in the mid-single-digit millions, structured in two pieces: a cash payment at closing, and a second payment — the earn-out — due about a year later, calculated as a multiple of the acquired business's adjusted earnings over that first year under new ownership.

An earn-out bridges a valuation gap. Nikhil believed his client relationships were worth a premium; Ming and Rohan were wary of paying full price for revenue that might not survive the transition once a founder who many clients considered a friend stepped away. Tying part of the price to actual post-closing performance let both sides agree to a deal without either side betting everything on a number neither could fully verify in advance.

The problem

Our team was engaged by Ming and Rohan's company before the deal was signed, and we drafted the earn-out mechanism into the share purchase agreement with as much precision as the parties would tolerate at the time — a defined formula for adjusted EBITDA (earnings before interest, tax, depreciation and amortization, adjusted for one-time or non-recurring items), a requirement that the acquired business be run as a reasonably separate unit during the earn-out period, and a dispute mechanism that named an independent accountant to resolve any disagreement over the calculation.

About thirteen months after closing, the dispute the clause was built for arrived. Ming and Rohan's finance team calculated the year-one adjusted EBITDA and it came in well short of the threshold needed to trigger any earn-out payment at all. Client attrition had been higher than projected, and several long-time clients had left within months of Nikhil's departure — a pattern common enough in personal care businesses, where the relationship is often with a specific caregiver rather than the company behind them.

Nikhil disputed the number on two grounds. First, he argued that after closing, the acquired clients had been serviced using staff and scheduling systems shared with Ming and Rohan's existing business, and that a portion of the combined company's overhead had been allocated against the acquired unit's revenue in a way that depressed its reported earnings — even though the agreement required the business to be run as a separate unit for earn-out purposes. Second, he argued that some clients counted as "lost" had simply been folded into the combined company's broader service roster and were still generating revenue, just not revenue being credited to the acquired business's books.

These are the two disputes that earn-outs generate most often. The buyer controls the business during the earn-out period and makes ordinary operating decisions — how staff are scheduled, how systems are shared, how costs are allocated — and some of those decisions affect the very number the seller's payment depends on. The seller, having lost control of the business, has to trust that the buyer's discretion was exercised in good faith rather than to suppress the payment. Even an honest buyer can find itself accused of manipulating the numbers simply by running the business the way it runs everything else.

What we did

1. Reviewed the earn-out clause against what had actually happened. The agreement required the acquired business to be operated as a reasonably separate unit with its own accounts during the earn-out period, but it also allowed shared services — payroll, scheduling software, management overhead — to be allocated on a reasonable basis. The dispute turned on whether the allocation methodology used was reasonable, which the clause did not define precisely. That imprecision, common in earn-out drafting because parties rarely want to negotiate every allocation rule at signing, was exactly the kind of gap the accountant mechanism existed to fill.
2. Advised against a unilateral recalculation. Ming and Rohan's instinct was to stand firm on their finance team's number and let Nikhil sue if he disagreed. We advised against that. The agreement specifically provided for an independent accountant, jointly selected or appointed by a professional accounting body if the parties could not agree, to resolve exactly this kind of dispute — and refusing to use it would have looked bad if the matter ever reached court, since courts generally expect parties to honour the dispute mechanisms they bargained for.
3. Engaged the independent accountant mechanism. We prepared the position paper for Ming and Rohan's side, laying out the allocation methodology used, the business rationale for shared scheduling and payroll systems, and the client attrition data showing the departures were concentrated among clients who had explicitly cited the loss of their long-time caregiver, not any change in service quality caused by the shared systems.
4. Addressed the "folded-in" clients directly. On Nikhil's second argument, we worked with the finance team to identify which formerly-acquired clients had in fact continued receiving services through the combined company after being reassigned internally. Several had, and their revenue had been recorded against the wrong internal cost centre — an honest bookkeeping error rather than deliberate suppression, but one that materially affected the number.
5. Negotiated a settlement once the accountant's preliminary findings came in. Before the independent accountant issued a binding determination, both sides received a preliminary view: the allocation methodology was largely reasonable, but the misclassified client revenue should be credited back to the acquired unit. That reframed the dispute from an all-or-nothing fight over roughly $340,000 in disputed earn-out payment down to a much narrower disagreement over how much of the misclassified revenue actually belonged in the calculation. We negotiated directly with Nikhil's counsel from that narrower base rather than pushing the dispute through to a formal binding determination, which would have taken longer and cost both sides more in accounting and legal fees than the gap between their positions justified.

The outcome

The parties settled at roughly $205,000 — about 60% of the amount Nikhil had originally claimed, and meaningfully more than the zero payment Ming and Rohan's initial calculation would have produced. Neither side got the number it started with. Nikhil accepted that the higher-than-expected client attrition was a real business outcome, not a manufactured one, and that he bore some of that risk under the deal he had signed. Ming and Rohan accepted that their finance team's initial allocation had been sloppy in at least one respect, and that a business they controlled during the earn-out period carried a corresponding duty to keep its books clean enough to withstand scrutiny.

The settlement also avoided a formal binding determination, which the agreement allowed but which neither side wanted to pay for over a dispute of this size. An independent accountant review of this kind typically takes a couple of months once engaged and comes with its own professional fees, split between the parties under most standard clauses — a cost that made a negotiated compromise the more sensible outcome once the scope of the real disagreement had narrowed.

For Ming and Rohan, the episode also became a lesson for the next deal. Their company has continued to grow by acquisition, and the earn-out mechanism in their subsequent agreements now specifies the shared-services allocation methodology in far more detail at signing, rather than leaving it to be argued over a year later.

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