Earn Out Disputes: Practical Considerations When Negotiating And Drafting Earn-Outs

Earn out provisions have become increasingly popular in Canadian private M&A transactions, appearing in 33% of surveyed deals in 2021.¹ They are intended to provide a "win-win" scenario for buyers and sellers. Earn outs are especially useful to bridge a valuation gap between the seller and buyer or to incentivize a seller to continue with the business post-closing. In our experience, earn out provisions in M&A agreements are growing in complexity, resulting in a higher risk of disputes among buyers and sellers when it comes time to measure whether an earn out will ultimately be paid to the sellers. This article provides practical takeaways for negotiating and drafting earn out provisions, informed by Canadian and US jurisprudence.