A startup acquired a smaller competitor. Half the price was paid upfront, half was an earn-out: the target team would receive the rest if it hit a certain revenue figure in the twelve months after closing. The figure missed. The seller said, “the buyer deliberately under-marketed the product and blocked us from reaching the target”; the buyer said, “the team didn’t work hard enough.” The contract contained neither a precise definition of “revenue” nor any obligation on the buyer to pursue the target. The result: a two-year dispute. The deal wasn’t bad; the earn-out clause was vague.
The earn-out is an indispensable tool in early-stage acquisitions: it bridges the valuation gap between buyer and seller and keeps the target team motivated after closing. But that same tool is the most notorious source of post-closing litigation — almost always because the milestones are loosely defined or the buyer’s obligation to actually pursue them is left unstated. In this piece, we cover the clauses that turn an earn-out from a trap into a mechanism that works.
Why Do Earn-Outs Blow Up So Often?
Because the earn-out is the one item where the parties’ interests diverge after closing. The seller wants to hit the target; the buyer is comfortable with any interpretation that lowers the price it pays. That structural tension turns straight into litigation when the contract isn’t clear. The three most common fights: how the milestone is measured, how the buyer runs the business, and how the period is counted.
Fight 1 — Defining the Milestone
“Revenue,” “EBITDA,” “active users” — all meaningless until defined. Revenue under which accounting standard? Including returns, discounts, intra-group sales? Which items are deducted from EBITDA? The longest part of the earn-out clause should be exactly these definitions. Choose a metric that is measurable, has a single meaning, and that a third party could look at and compute.
Fight 2 — The Buyer’s Duty to Pursue
After closing, the buyer runs the business. If the buyer shelves the product, cuts marketing, or moves the team to another project, hitting the target becomes impossible. That’s why the contract must contain an explicit commitment that the buyer will run the business with “reasonable commercial efforts” during the earn-out period. Better still: define minimum commitments for concrete inputs such as budget, headcount, or marketing spend. Otherwise the seller is deprived of the very tools needed to hit the target.
Fight 3 — Time, Control, and Transfer
What happens if, during the earn-out period, the buyer restructures, sells, or merges the target into another unit? The contract must resolve these scenarios in advance: a change of control can accelerate the earn-out, or the measurement method is preserved. Left ambiguous, every corporate move opens a new door to dispute.
Mechanisms That Protect an Earn-Out
A well-structured earn-out secures both the money and the process:
- Clear definitions — make the metric, accounting basis, and calculation method unambiguous.
- Duty to pursue — put the buyer’s reasonable-commercial-efforts (or concrete-input) obligation in writing.
- Information and audit rights — let the seller access the relevant financials throughout the measurement period.
- Dispute resolution — add an independent expert/auditor mechanism for calculation disputes; don’t leave everything to the courts.
- Change-of-control clause — predetermine the earn-out’s fate on transfer/merger/restructuring.
- Security — secure payment with escrow or holdback where needed.
Treat the Earn-Out as Engineering, Not Negotiation
The earn-out is the most dangerous clause to say “we’ll sort it out later” about — because “later” is precisely when the parties’ interests have already diverged. Earn-outs that work are engineered upfront: a measurable target, a duty to pursue, information rights, and fast dispute resolution. When acquiring a company, take a clause that makes up half the price as seriously as half the price.
Have an earn-out deal? Let’s structure the clause so it doesn’t breed litigation. Schedule a call →
Frequently Asked Questions
Why do earn-outs trigger disputes so often?
Because the parties’ interests diverge after closing: the seller wants to hit the target, the buyer to lower the price.
Which clause matters most?
A clear definition of the milestone and the buyer’s duty to run the business with “reasonable commercial efforts.”
How do I secure an earn-out?
With clear metric definitions, information/audit rights, independent-expert dispute resolution, and escrow where needed. For broader context, see our acquisition guide.
Sources
- Turkish Code of Obligations (freedom of contract, performance) — Legislation: https://www.mevzuat.gov.tr/mevzuatmetin/1.5.6098.pdf
- Vircon Legal — When Startups Become Buyers (M&A Guide): https://virconlegal.com/startups-acquiring-companies-ma-guide/
This article is for general information only and does not constitute legal advice. For a specific situation, please consult Vircon Legal.
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