Disputes arising from earn-out clauses have doubled in frequency in recent years. According to the Harvard Law School Forum, litigation related to these clauses has nearly doubled in recent years. The problem is not with the mechanism itself, but with how it is designed and executed. A poorly structured earn-out can turn what should be a bridge between expectations into a legal battlefield.
An earn-out functions as a variable price linked to the future performance of the acquired company. Buyers and sellers use it to bridge valuation gaps when projections do not align. In theory, everyone wins. In practice, approximately 26% of earn-out deals result in disputes, according to Grant Thornton. The difference between success and failure lies in the contractual details.
Why EBITDA-Based Earn-Out Clauses Fail
Normalized EBITDA is the preferred metric for calculating earn-outs. It seems objective but contains dangerous pitfalls. If four financial experts are asked to calculate the EBITDA of the same company, you may get four different results. All technically correct, but different.
Normalization involves excluding non-recurring items—here is where conflicts often start. Should an insurance payout for a claim be excluded? Probably yes. And what about an annual hiring subsidy? It depends on whether it is considered recurring income. The answer changes depending on who interprets the contract.
After the acquisition, the buyer has operational control. They may impose management fees that reduce EBITDA, modify depreciation policies, or alter accounting criteria within legal limits. Without specific protective clauses, the seller is exposed to decisions that can destroy their earn-out.
Delaware courts have recently shown a greater willingness to rule against buyers. Six out of seven recent decisions favored the seller. This shift reflects lower judicial tolerance for ambiguities that benefit the party controlling financial information.
How to Avoid Earn-Out Errors During Negotiation
Prevention begins with defining metrics with surgical precision. The contract must specify not only what is measured but exactly how the calculation is performed. Including tables with concrete numerical examples eliminates interpretive gray areas. An annex calculating the normalized EBITDA of the last fiscal year can serve as a binding reference for future measurements.
Progressive thresholds outperform binary targets. Instead of paying 100% if the target is met and 0% if not, establishing proportional tranches better aligns incentives for both parties. The seller receives some compensation even if they do not reach 100%, while the buyer pays proportionally to the value generated.
The earn-out timeframe must be realistic. Beyond three years, the seller loses the ability to influence results. Typically, the range is between two and five years, though optimal duration depends on the business cycle.
Confianz structures earn-outs with a success probability above 80% because they design them from the outset with realistic feasibility. This means rejecting inflated seller projections and disproportionate buyer demands.
Control Mechanisms That Prevent Earn-Out Disputes
The seller needs visibility into post-closing management. Information rights should include access to monthly financial statements, details of extraordinary expenses, and advance notice of significant accounting changes. Without this transparency, detecting deviations is impossible until the damage is already done.
Ordinary course covenants limit harmful decisions. Prohibiting workforce reductions above 10%, marketing investments below historical levels, or commercial policy changes without consent protects the seller from actions that destroy short-term value.
The dispute resolution mechanism determines whether a disagreement remains manageable or becomes costly litigation. Appointing an independent expert with pre-defined procedures and timelines allows technical differences to be resolved without going to court. The expert should have specific experience in business valuation and full access to all relevant financial documentation.
With over 30 years of experience in business sales and acquisitions in Spain, Confianz acts as a strategic partner in designing these control mechanisms. The experience accumulated in complex transactions allows potential friction points to be anticipated before they crystallize into open conflict.
The difference between a successful earn-out and one that ruins the deal does not lie in the creativity of the drafting lawyer. It lies in understanding the real incentives of each party, translating them into verifiable formulas, and anticipating scenarios that no one wants to imagine. This preventive realism, combined with deep knowledge of the Spanish market, is what separates successful transactions from those that end in years of litigation
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