Navigating Earn-Out Disputes: Key Considerations For Private Funds

Times of economic volatility often increase disparities between a seller's valuation and the buyer's valuation of the same company. Earn-out provisions are one tool frequently used to address such disparities. An earn-out provision requires the buyer to make one or more post-closing payments (the "earn-out consideration") to the seller if the company being sold (the "earn-out entity") meets certain milestones during a defined post-closing period (the "earn-out period," which is usually between one to five years). These milestones may include EBITDA, gross revenue, net income, the expansion of the business into defined geographic or product areas, or other metrics.

Earn-out provisions can be fertile grounds for post-closing disputes between the seller and buyer. Specifically, earn-out provisions often lead to disputes as to whether the identified milestones were satisfied during the earn-out period, and if so, the amount of earn-out consideration that the buyer is