Enforcing Earn-Out Information Rights After a Sale

The situation

Zainab started as a line cook at a small lakeside inn and restaurant in Leamington. Agnieszka was the front-desk supervisor down the road at a larger hotel before she came on to help run the inn's front office. Kasia joined a few years later to manage the books and the day-to-day. Over roughly twelve years, the three of them bought out the original owner in stages and built the business into a nine-room inn with an attached restaurant that did steady trade with the region's greenhouse and agricultural workers as well as summer visitors heading to the lake.

When a regional hospitality group approached them about buying the business outright, the three co-owners agreed to a sale priced at roughly $5.2 million. About $4.1 million was paid in cash at closing. The remaining roughly $1.1 million was structured as an earn-out — a portion of the purchase price paid only if the business hit agreed financial targets over the two years following closing. Earn-outs are common when a buyer and seller cannot agree on what the business is really worth, or when the buyer wants the outgoing owners to stay engaged through the transition. Here, the earn-out was tied to the inn and restaurant's EBITDA — earnings before interest, tax, depreciation and amortization, a standard measure of a business's underlying profitability — over each of the two years post-closing.

The purchase agreement gave Zainab, Agnieszka and Kasia a contractual right to quarterly financial statements for the business and the ability to request supporting records if they disputed a calculation. That clause was about to matter far more than any of them expected.

What the review found

Within a few months of closing, the buyer began integrating the inn into its broader portfolio of properties — a normal step after an acquisition, but one that changed how the business's numbers were kept. Bookings, payroll and purchasing were folded into the group's shared systems. Corporate overhead from the head office started appearing as an allocated expense against the Leamington property, something that had never existed when Zainab, Agnieszka and Kasia ran the business independently.

The first quarterly statement arrived late and was thin — a summary page with none of the underlying detail the agreement called for. The second one did not arrive at all until Zainab followed up twice. When it did come, EBITDA for the property was shown as meaningfully lower than the trio's own tracking suggested it should be, largely because of a new line item for allocated corporate costs that had not been part of the earn-out formula the parties negotiated. Kasia, who had kept the books for years before the sale, pulled together her own running numbers from occupancy and covers she still tracked out of habit, and the gap between her estimate and the buyer's statement was large enough that it could not plausibly come from normal accounting judgment alone. Agnieszka, who stayed on briefly to help with the transition at the front desk, also noticed operational changes after closing — reduced staffing hours, a pause on routine maintenance — that would flatter the buyer's own near-term margins while doing nothing to help the very figure the sellers were owed against.

This is one of the most common flashpoints in an earn-out: the seller no longer controls the business, but the buyer's decisions about how to run it — what costs to allocate, how aggressively to invest, whether to fold the location into shared systems — directly affect whether the seller gets paid. Without real visibility into the numbers, the sellers had no way to tell whether the shortfall was genuine or an artifact of new accounting choices made by someone who now had every incentive to keep the earn-out payment low.

What we did

1. Reviewed the earn-out and information rights clauses closely. The purchase agreement defined EBITDA for earn-out purposes in a specific way, and it entitled the sellers to quarterly statements plus supporting documentation on request. We compared what had actually been delivered against what the contract required, and confirmed the buyer was in breach of both the timing and content obligations.
2. Sent a formal written demand. Rather than let informal follow-up emails drag on, we put the buyer's counsel on notice in writing, citing the specific contractual provisions, and set a deadline for the outstanding quarterly detail and supporting general ledger entries for the disputed corporate overhead allocation.
3. Brought in an accountant to test the allocation. Once the records arrived, we worked with an accountant to determine whether the corporate overhead allocated to the Leamington property was consistent with the earn-out definition in the agreement, or whether it improperly imported costs that had not existed in the business the sellers actually built and sold.
4. Opened a structured negotiation rather than filing a claim immediately. Litigation over an earn-out dispute is expensive and slow, and going to the Superior Court would likely have taken well over a year to resolve, during which the second earn-out year would already be underway using the same disputed methodology. We used the accountant's findings as the basis for a direct negotiation with the buyer's counsel, aimed at a recalculated figure for year one and a clearer, agreed protocol for year two.
5. Documented the resolution in writing. Once the buyer agreed to a revised figure, we made sure the settlement was captured in a signed amendment that also fixed the reporting cadence and format going forward, so the same dispute could not recur in the second earn-out year without a clear paper trail.

The outcome

The accountant's review found that some of the corporate overhead allocation was defensible under the agreement's broad language, but a meaningful portion — related to systems and marketing costs the Leamington property had not used or benefited from — was not. After negotiation, the buyer agreed to recalculate year one EBITDA, which increased the earn-out payment for that year from roughly $310,000 to about $460,000, closer to what Zainab, Agnieszka and Kasia's own tracking had projected, though still short of the full amount they had hoped for.

It was not a full win. The parties settled on a middle figure rather than the sellers' original number, and litigation might have produced a better result — or a worse one, after a year or more of legal costs and uncertainty. What the sellers avoided was the larger risk: going into the second earn-out year with the same disputed allocation method unresolved, and no enforceable agreement about how the numbers would be reported. The amended agreement fixed both the pending shortfall and the process for the year ahead.

For Zainab, Agnieszka and Kasia, the hard lesson was that selling the business did not mean the work was done. The earn-out period asked them to trust someone else's accounting for money that was still, in real terms, theirs. Acting on the information rights clause early — rather than waiting to see if the numbers corrected themselves — was what turned a vague grievance into a documented, negotiable dispute with real numbers behind it.

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