The Earn-Out Clause That Kept a Business Sale Out of Court

The situation

Omar worked full time as a software developer. Sana worked full time as a pharmacist. On top of both jobs, the two of them had spent eight years building a subscription meal-kit business out of a rented commercial kitchen in Richmond Hill, delivering pre-portioned ingredients and recipe cards to a growing list of weekly subscribers across the region. By its eighth year, the business had a stable base of paying subscribers, a small delivery staff, and revenue that had finally caught up to the hours they had put into it. Neither of them wanted to run it forever alongside their day jobs, and when a prospective buyer approached them, they were ready to listen.

The buyer was Soo-jin, an experienced food-service operator looking to leave a corporate role and run something of her own. She valued the business at roughly $3,400,000, based mainly on its subscriber count and its revenue trend over the previous two years, which had grown faster than usual after a regional competitor closed down. Omar and Sana came to Treadstone Law once they had agreed on a price in principle and needed the sale agreement drafted, including how much of that price would depend on the business performing as well under new ownership as it had under theirs.

Where the numbers were exposed

The growth that justified Soo-jin's valuation had a specific, fragile source: a competitor's closure had pushed a wave of new subscribers toward Omar and Sana's business in the year before the sale. Nobody could say with confidence how many of those subscribers would stay loyal once a new owner took over pricing, recipes, and delivery schedules. Soo-jin was reasonably unwilling to pay full price up front for revenue that might not hold. Omar and Sana were reasonably unwilling to accept a price built only on older, slower-growth numbers and give up the value of the subscriber base they had just spent a year growing.

An earn-out is the tool built for exactly this gap: part of the price is paid at closing, and the rest is paid later, calculated against how the business actually performs once the new owner is running it. It let Soo-jin pay a fair price for a subscriber base of known size while protecting her from paying full price for growth that turned out to be temporary. It let Omar and Sana capture the upside of that growth if it proved durable, instead of walking away from it entirely. The concept solved the valuation problem. What actually determined whether it worked was how precisely the earn-out was written, and what happened when the two sides didn't see eye to eye once the year's results came in.

What we did

1. Split the price into a base payment and a capped earn-out. We negotiated a base payment of about $2,400,000 at closing, reflecting the subscriber base and revenue the business had shown over its three years before the competitor's closure. A further amount of up to roughly $1,000,000 was payable after twelve months if active subscriber revenue met or exceeded a defined target, capping the total price at Soo-jin's original $3,400,000 valuation without requiring her to pay it if the growth didn't hold.
2. Tied the earn-out to a metric both sides could verify independently. Rather than net profit, which depends heavily on how a new owner chooses to allocate costs, the earn-out was tied to gross active-subscriber revenue, measured directly from the subscription platform's billing records — a number neither side could quietly shape through accounting choices.
3. Set operating covenants that protected both sides without freezing the business in place. Soo-jin agreed to run the subscription program in good faith for the earn-out period — keeping the core weekly delivery model in place, not deliberately discounting or bundling in a way designed to move revenue outside the measured category — while retaining full authority over recipes, suppliers, pricing adjustments, and staffing.
4. Built in a distinction between ordinary churn and deliberate suppression. Subscription businesses lose customers for reasons that have nothing to do with how well they're run. The agreement set an expected baseline subscriber attrition rate based on the business's own multi-year history, so a shortfall within that normal range wouldn't automatically count as a breach of Soo-jin's operating obligations, while a shortfall well beyond it would trigger closer scrutiny of what had changed.
5. Required an independent review before either side could allege a problem. Omar and Sana had the right to have an independent accountant review the subscriber revenue records once, at their own cost, if they disputed the reported figure — replacing guesswork about what was happening inside a business they no longer controlled with an actual audit of the numbers.
6. Required mediation through the agreement itself before any lawsuit. Rather than leaving a disagreement to escalate straight into litigation, the agreement required both sides to first attempt to resolve any earn-out dispute through a structured negotiation period, with a named mediator available if that failed, before either side could file a claim in court.

The outcome

Twelve months after closing, active subscriber revenue came in roughly 35 percent below the earn-out target — well beyond the baseline attrition the agreement had anticipated. Omar and Sana believed Soo-jin had changed the weekly recipe rotation and raised prices faster than the subscriber base could absorb, driving away customers who would otherwise have stayed. Soo-jin believed the falloff was simply the temporary spike from the competitor's closure unwinding on its own, as some subscribers who had only switched out of short-term necessity drifted back to other options.

Both explanations were plausible, and the billing records alone couldn't settle which one was true. Because the agreement gave Omar and Sana an audit right rather than leaving them to speculate, their accountant reviewed twelve months of subscriber-level data and found a mixed picture: some of the loss tracked closely with subscribers who had joined right after the competitor closed and cancelled within a few months regardless of pricing, and some tracked with a pricing change introduced roughly six months in. Neither side could prove the other was fully responsible, and neither side wanted the cost, delay, or uncertainty of putting the question to a judge to decide.

Using the mediation process the agreement required, the two sides negotiated a settlement rather than litigating the causation question. Instead of the full $1,000,000 earn-out or zero, Soo-jin agreed to pay Omar and Sana roughly $420,000 — reflecting the portion of the shortfall their accountant's review attributed to ordinary post-spike attrition, while crediting Soo-jin for the portion tied to the pricing decision she had made within her own operating authority. Omar and Sana received meaningfully less than the $1,000,000 they had hoped for at signing, a real gap between what they had planned around and what they actually received. Soo-jin paid more than she believed the shortfall justified, a real cost on her side too. Neither side left the negotiation satisfied, but both left with a number they could accept, arrived at through a process the agreement itself had set out, in a matter of weeks rather than the year or more a lawsuit over causation would likely have taken.

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