Earn-Out Disputes After Selling a Business: Your Legal Rights
Earn-out disputes in the UK are one of the most common sources of post-acquisition litigation. If you have sold a business and your earn-out payment has been reduced or withheld, you may have a claim for breach of the share purchase agreement (SPA).
Introduction
Selling a business is often the result of years – sometimes decades – of work building value, relationships and reputation. For many founders and management shareholders, the sale should represent a successful exit and financial reward.
However, when part of the purchase price is structured as an earn-out, the reality can be very different.
Instead of receiving the full sale price on completion, a portion of the consideration is deferred and made dependent on the future performance of the business. While earn-outs are common in UK mergers and acquisitions, they are also one of the most frequent causes of post-sale disputes.
We are increasingly contacted by business owners who believe the buyer is manipulating the earn-out calculation, reducing profits or diverting revenue in order to minimise the amount payable.
If you believe this may be happening, it is important to understand that you may have significant legal rights. An earn-out dispute in the UK is usually governed by the Share Purchase Agreement (SPA), and careful analysis of that agreement can reveal strong legal claims.
What Is an Earn-Out in a Business Sale?
An earn-out is a contractual mechanism used in many UK business sales where part of the purchase price is paid later depending on how the business performs after completion.
Typically, the buyer pays an initial amount when the sale completes and agrees to make further payments if the business reaches agreed performance targets.
For example:
A buyer might pay £4 million on completion, with a further £2 million payable if the company achieves agreed EBITDA targets during the next two financial years.
Earn-outs are often used when the buyer and seller disagree about the value of the business. The buyer wants protection against overpaying, while the seller believes the company will continue to grow.
However, once the buyer takes control of the business, the seller may have limited influence over how the company is run.
That shift in control is one of the main reasons earn-out disputes arise in the UK.
Why Earn-Out Disputes Are So Common
In theory, earn-outs align the interests of the buyer and seller. In practice, they can create conflicting incentives.
Before completion, both parties want the deal to happen. After completion, the buyer may prioritise the wider interests of its group of companies rather than maximising the earn-out payment.
Disputes often arise where:
- the business is integrated into the buyer’s existing group
- accounting policies change after the acquisition
- overhead costs are allocated to the target company
- revenue is recognised in another group entity
A frequently overlooked commercial reality is that the seller may have little visibility over what happens inside the business after the transaction completes. Without careful drafting in the SPA, the buyer may have broad discretion in how the company is managed.
This is why earn-out litigation often focuses heavily on the exact wording of the contract.
Common Ways Buyers Manipulate Earn-Out Calculations
When founders suspect that a buyer is manipulating the earn-out, the issue often falls into one of several recurring categories.
Artificially Increasing Costs
One of the most common ways an earn-out is reduced is by increasing the operating costs of the target business.
After the acquisition, the buyer may introduce new costs such as:
- group management charges
- shared service allocations
- additional staff or consultants
- integration or restructuring expenses
These charges can reduce the company’s reported profits and therefore the earn-out payment.
The key legal question is usually whether the SPA allows those costs to be included in the earn-out calculation.
Many agreements require accounts to be prepared consistently with the historic accounting practices of the business, which can limit the buyer’s ability to introduce new charges.
A particularly technical accounting issue sometimes arises where shared group costs are allocated to the target company but the commercial benefits of being part of a larger group are not reflected in the accounts. This can produce a result that understates the true performance of the business.
Moving Revenue to Another Group Company
Another common cause of an earn-out clause dispute occurs when revenue is shifted away from the company that is subject to the earn-out.
For example:
- customers may be invoiced through another group entity
- contracts may be transferred to a different subsidiary
- new sales may be routed through a centralised group sales structure
On paper, the target company’s revenue declines. In reality, the buyer’s group may still be benefiting from the goodwill and relationships built by the seller.
Whether this behaviour is lawful depends heavily on the wording of the SPA. Some agreements include provisions designed to prevent the buyer from diverting business away from the target company during the earn-out period.
Changing Accounting Policies
Accounting changes are one of the most technically complex areas of earn-out litigation.
Small adjustments in accounting treatment can significantly affect reported profit.
Common examples include:
- delaying recognition of revenue
- increasing provisions for doubtful debts
- reclassifying costs as operating expenses
- changing how development costs are treated
These adjustments can have a material impact on EBITDA or net profit.
A specialist point often seen in disputes is where the buyer applies accounting policies that are technically permissible but inconsistent with the historic approach used by the business before the sale. If the SPA requires consistency with previous accounting practices, those changes may breach the agreement.
Failing to Pursue Sales Opportunities
Not all earn-out disputes relate to accounting adjustments.
In some cases, the dispute concerns how the buyer operates the business after completion.
Sellers sometimes argue that the buyer:
- reduced marketing expenditure
- delayed product launches
- reassigned key sales staff
- prioritised other group products instead of the acquired business
The legal question is whether the buyer was required to operate the business in a way that preserved the seller’s opportunity to earn the deferred consideration.
English law does not automatically require a buyer to maximise an earn-out. However, some SPAs contain obligations to act in good faith or avoid taking steps specifically intended to reduce the earn-out.
These clauses can become critical in an earn-out dispute lawyer UK case.
Legal Claims in Earn-Out Disputes
If the buyer has acted improperly, several types of legal claim may be available.
Breach of the Share Purchase Agreement
The most common claim is breach of contract.
If the buyer has not followed the calculation method set out in the SPA, the seller may have a claim for damages.
Examples may include:
- using incorrect accounting policies
- allocating costs that are prohibited under the agreement
- diverting revenue away from the target business
- failing to follow the contractual dispute resolution process
In many earn-out dispute UK cases, the outcome turns on detailed contractual interpretation.
Breach of Implied Duties
In certain situations, the court may recognise implied contractual obligations.
These may arise where the earn-out structure assumes that the buyer will not deliberately undermine the performance of the business.
For example, if the buyer takes steps that destroy the commercial purpose of the earn-out mechanism, the court may consider whether an implied limitation on such conduct should apply.
This is a subtle area of contract law, and the success of these arguments depends heavily on the wording of the agreement and the surrounding circumstances.
Misrepresentation
Another possible claim is misrepresentation.
This may arise if the buyer made statements before the sale that induced the seller to accept the earn-out structure.
For example, the buyer may have stated that:
- the business would continue operating independently
- no group overheads would be charged
- the management team would remain in place
- the buyer would invest in future growth
If these statements were relied upon and later proved false, the seller may have a claim.
However, SPAs often include entire agreement clauses designed to limit liability for pre-contract statements, so these claims require careful legal analysis.
Remedies Available in Earn-Out Litigation
Where the buyer has breached the SPA or acted improperly, several remedies may be available.
Damages
The most common remedy is damages for breach of contract.
The court will attempt to calculate what the seller should have received if the earn-out had been calculated correctly.
This often requires expert financial evidence to reconstruct the accounts on the correct basis.
Declaratory Relief
In some cases the dispute concerns how the SPA should be interpreted.
The court may make a declaration confirming the correct accounting approach or calculation method.
This can be particularly useful where the earn-out period is still ongoing.
Expert Determination
Many SPAs include provisions requiring accounting disputes to be referred to an independent expert rather than the court.
This process can resolve technical accounting disagreements relatively quickly.
However, a less widely appreciated procedural point is that expert determination usually applies only to accounting calculations. Wider legal claims such as misrepresentation or breach of broader contractual obligations may still need to be resolved by the court.
What To Do If You Suspect Earn-Out Manipulation
If you believe the buyer is manipulating the earn-out, early legal advice is extremely important.
Some practical steps include:
- Review the SPA carefully: The earn-out clause must be read alongside definitions, accounting schedules and dispute resolution provisions throughout the agreement.
- Analyse the financial accounts: Comparing historic accounts with post-sale accounts may reveal changes in accounting policy or cost allocation.
- Preserve evidence: Internal emails, board papers and financial reports may become crucial evidence in an earn-out dispute.
- Act quickly: Many SPAs contain strict deadlines for challenging the earn-out calculation. Missing those deadlines can significantly weaken a claim.
Speak to an Earn-Out Dispute Solicitor
Earn-outs can be a useful tool in business sales, but they can also create complex legal disputes when the buyer controls the business after completion.
If you are facing an earn-out dispute in the UK, or believe the buyer is manipulating the earn-out calculation, it is important to obtain specialist legal advice as early as possible.
At The Jonathan Lea Network, we advise founders, shareholders and management teams involved in complex post-sale disputes, including earn-out litigation, SPA breaches and shareholder exit negotiations.
Early advice can often make a significant difference to the outcome.
Contact Us For Advice
We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT, depending on the complexity of the issues and seniority of the fee earner).
Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.
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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.