Can I Challenge an EBITDA Earn-Out Calculation After Selling My Business?

An EBITDA earn-out can become contentious if the buyer’s calculation reduces or removes the deferred payment the seller expected.

This guide explains when an EBITDA earn-out calculation may be challenged, what the sale agreement usually controls, and why deadlines, evidence and legal/accounting advice matter.

Why Do EBITDA Disputes Arise?

If you sold a business and part of the price depends on an Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) earn-out, it can be deeply frustrating to receive a calculation that reduces or removes the payment you expected. If the buyer has loaded costs into the business, changed accounting treatment, deferred revenue, allocated group overheads or otherwise adjusted EBITDA in a way that affects your deferred consideration, you may have grounds to challenge the calculation, particularly where those adjustments are inconsistent with the earn-out provisions or the agreed accounting basis in the sale agreement.

What Is an EBITDA Earn-Out?

An earn-out is a contractual mechanism used in share purchase agreements (SPA) or asset purchase agreements (APA) (Sale Agreement). Part of the purchase price is paid after completion if the business achieves agreed financial or operational targets during a defined period.

Earn-outs are often used to bridge a valuation gap. A seller may believe the business will continue to grow strongly, while a buyer may be more cautious about paying the full price upfront. By deferring part of the price, the parties try to align the final consideration with actual post-completion performance.

EBITDA stands for earnings before interest, tax, depreciation and amortisation. In simple terms, it is a measure of trading performance before certain financing, tax and accounting charges are taken into account. It is commonly used in business sales because it can give a clearer picture of operating profitability than net profit alone.

EBITDA depends on how income and costs are recorded, which adjustments are allowed, and which accounting policies apply. In many earn-out clauses, the parties agree “adjusted EBITDA”, which means EBITDA as defined in the contract after specific add-backs or exclusions. In an earn-out dispute, the key question is rarely “what is EBITDA generally?” The more important question is “what does the Sale Agreement say EBITDA means for this particular earn-out?”

Disputes arise because, after completion, the buyer usually controls the business. The seller’s entitlement depends on performance, but the buyer controls many of the decisions, records and accounting judgments that affect how performance is measured. That can create tension, particularly where the earn-out is valuable and the calculation is sensitive to adjustments.

What Do EBITDA Adjustments and Accounting Gamesmanship Look Like?

From a legal perspective, the issue is not whether the buyer has behaved unfairly in a broad sense. The focus is on whether the buyer has complied with the earn-out provisions, applied the agreed accounting basis correctly, and avoided conduct that undermines the contractual bargain.

Common examples include:

• Loading additional costs into the target business: A buyer may allocate central management charges, group service fees, IT costs, HR support, finance costs or other overheads to the acquired business. Some of these costs may be commercially legitimate, but they can materially reduce EBITDA if they go beyond what the Sale Agreement permits or depart from historic practice. The seller may argue that the buyer has artificially depressed earnings by introducing costs the business did not previously bear.
• Changing accounting policies after completion: A buyer may change revenue recognition, stock valuation, provisioning, bad debt treatment, or the way costs are capitalised or expensed. Where the Sale Agreement requires consistency with past practice, or sets a clear accounting hierarchy, those changes may be open to challenge.
• Delaying or diverting revenue: A buyer may delay invoicing, defer revenue recognition in practice, move customer contracts to another group company, or route new opportunities outside the target business. It may present this as sensible integration, but the seller may say it shifts value away from the business whose EBITDA drives the earn-out.
• Accelerating expenditure into the earn-out period: A buyer may bring forward marketing costs, restructuring costs, recruitment costs, professional fees or integration expenses. If those costs reduce EBITDA during the earn-out period, the seller may need to consider whether they are ordinary trading costs, excluded costs, exceptional items, or costs that should be added back under the Sale Agreement.
• Creating provisions or write-offs: Provisions for doubtful debts, slow-moving stock, contract losses or future liabilities can reduce EBITDA significantly. These may be valid accounting judgments, but they can become contentious where they are unusually conservative, poorly evidenced, or inconsistent with how the business was historically managed.

Not every adjustment that reduces an earn-out can be challenged. Once the deal completes, the buyer is generally free to run the business, subject to any specific conduct or earn-out protections in the Sale Agreement. Stronger claims usually involve a clear contractual breach, misapplication of the earn-out formula, improper accounting adjustments, or buyer conduct that prevented the targets from being met.

Why the Sale Agreement Is the Starting Point

English law generally respects freedom of contract, so the parties’ rights depend mainly on what the SPA or APA actually says, not on a broad idea of fairness.

Key provisions usually include the earn-out formula, the definition of EBITDA, the accounting policies, permitted adjustments, the buyer’s conduct obligations, information rights and the dispute resolution process. A well-drafted Sale Agreement will spell out how EBITDA is calculated, often by reference to UK GAAP, IFRS, historic accounting policies, buyer group policies, or a hierarchy between them, because disputes often arise where those point in different directions.

The Sale Agreement may also set specific EBITDA adjustments, such as add-backs for exceptional costs, exclusions for intra-group charges, treatment of transaction costs and owner remuneration, and rules on integration costs; poor drafting here creates more scope for disagreement. Some Sale Agreements add conduct protections for the earn-out period, requiring the buyer to operate in the ordinary course, keep separate accounts, avoid diverting business, maintain working capital or avoid steps designed to reduce the earn-out, and breaches can underpin a contractual claim.

Others are more buyer-friendly, giving broad discretion to run the business and stating the buyer need not maximise the seller’s earn-out; in those cases, any claim usually has to focus more narrowly on the calculation mechanism, accounting treatment, information rights and limits on how that discretion is exercised.

Key Legal Principles Under English Law

Although every earn-out dispute turns on the specific wording of the contract, several legal principles often matter.

• Express contractual obligations: These are usually the clearest route to a claim. If the Sale Agreement says how EBITDA must be calculated, which costs may be included, which accounting policies apply, or how the business must be operated during the earn-out period, failure to follow those provisions may amount to breach of contract.
• Implied duties and good faith arguments: English law is cautious about implying broad duties of good faith into commercial contracts. However, in some circumstances, particularly where the agreement requires ongoing cooperation and honesty to make the mechanism work, implied duties may be relevant. These arguments are fact-sensitive and should usually support, rather than replace, the express wording of the Sale Agreement.
• Braganza-type discretion principles: Where one party has a contractual discretion that affects another party’s financial outcome, the law may require that discretion to be exercised honestly, rationally and for proper purposes. This can be relevant where the buyer controls accounting judgments, cost allocations, provisions or management decisions that directly affect the earn-out.
• The prevention principle: A party cannot usually rely on the failure of a condition if it has caused that condition to fail. In an earn-out context, this may be relevant where the buyer’s conduct prevented the business from achieving the EBITDA target and the buyer then relies on that failure to avoid payment.

How to Challenge an EBITDA Earn-Out Calculation

• Review the Sale Agreement and earn-out schedule: Start with the transaction documents, including the SPA or APA, the earn-out schedule, any definitions of EBITDA or adjusted EBITDA, the accounting policies, conduct of business clauses, information rights and dispute resolution provisions. Small drafting differences, for example, between “consistent with past practice” and “in accordance with the buyer’s accounting policies”, can have major financial consequences.
• Check the objection deadline: Many earn-out clauses impose strict time limits for challenging the buyer’s calculation, sometimes giving only a short window after receipt of the earn-out statement to serve a formal objection notice. Missing that deadline can be highly damaging, and in some cases the buyer’s calculation may become final and binding if no valid objection is served.
• Request the underlying financial information: The headline earn-out statement is rarely enough. Sellers usually need the underlying workings, management accounts, ledgers, journals, cost allocation schedules, revenue reports and explanations for specific adjustments. Where the Sale Agreement grants information or audit rights, these should be exercised carefully and in writing, with focused requests tied to specific clauses and disputed figures rather than general allegations of manipulation.
• Identify whether the dispute is accounting, legal, or both: Some disputes are mainly accounting questions, such as how a provision has been calculated or a cost categorised. Others are legal, for example whether group costs could be allocated, whether revenue should have been booked to the target business, or whether the buyer breached an obligation to operate in the ordinary course. Many EBITDA earn-out disputes involve both strands, which matters because accounting issues may have to go to an independent expert, while legal issues are usually dealt with through negotiation, arbitration or court proceedings.
• Gather evidence of financial impact: A seller needs to show more than disappointment with the result; the key question is whether the disputed accounting treatment or buyer conduct caused or contributed to the reduced earn-out. Helpful evidence can include pre-sale forecasts, historic accounts, budgets, board minutes, integration plans, correspondence, management reports and records of changes in accounting treatment, and in some cases forensic accounting input is needed to reconstruct what EBITDA would have been without the disputed adjustments.

Practical Steps to Protect Your Position

Even before a dispute escalates, there are practical steps you can take to protect your entitlement.

1. Preserve the objection timetable: Check the Sale Agreement immediately and diarise any deadline for serving an objection notice. Do not assume that a general complaint will be enough. The agreement may require objections to identify disputed items and reasons with a particular level of detail.
2. Keep communications formal and measured: If you suspect the buyer has manipulated EBITDA, raise concerns in writing and refer to the relevant contractual provisions. A clear paper trail can help later, but aggressive or unsupported allegations may make resolution harder.
3. Use information rights proactively: If the Sale Agreement gives you access to accounts, records or supporting documents, use those rights before the position becomes entrenched. Early access may reveal whether the dispute concerns a genuine accounting judgment, a misunderstanding, or a more serious departure from the agreed framework.
4. Coordinate legal and accounting advice: EBITDA disputes are rarely just legal or just accounting. A solicitor can interpret the Sale Agreement and protect procedural rights, while an accountant can analyse the figures. Coordinated advice is usually the most effective way to identify the strongest points and avoid wasting time on weak objections.

Risks, Time Limits and Commercial Considerations

Pursuing an EBITDA earn-out claim involves both legal and commercial risks.

Contractual deadlines are often the most urgent issue. The Sale Agreement may include time limits for responding to an earn-out statement, serving an objection notice, providing supporting reasons, or referring unresolved issues to an expert. Missing these deadlines may significantly weaken the claim.

Statutory limitation periods may also be relevant. For claims founded on simple contract, the general position under section 5 of the Limitation Act 1980 is that an action must not be brought after six years from the date on which the cause of action accrued. However, this does not override shorter contractual time limits in the Sale Agreement, so early review remains essential.

There are also evidential challenges. It is not enough simply to show that the earn-out was lower than expected. The seller may need to prove that the buyer’s accounting treatment or conduct caused a reduction in EBITDA. That can require detailed financial evidence and a clear explanation of what the figure should have been.

Cost and proportionality should also be considered. Earn-out disputes can be document-heavy and may involve accounting experts, solicitors, expert determination, arbitration or court proceedings. A sensible strategy should compare likely recovery against legal spend, management time and commercial risk.

Ultimately, the strength of any EBITDA earn-out challenge will depend on the precise wording of the SPA /APA, the accounting evidence and whether the required procedural steps are followed in time. Acting early, preserving contractual rights and obtaining coordinated legal and accounting advice can significantly improve the prospects of resolving the dispute effectively and proportionately.

EBITDA Earn-Out Dispute FAQs

How JLN Can Help

EBITDA earn-out disputes sit at the intersection of corporate law, contract interpretation and financial analysis, and they demand a careful, commercially informed approach.

At JLN, we advise business owners, founders, shareholders, buyers and investors on earn-out and other post-completion disputes, including SPA/APA interpretation, review of transaction documents, assessment of EBITDA calculations, identification of key deadlines, preparation of objections and engagement with the buyer, as well as, where appropriate, expert determination or formal proceedings.

We also help structure earn-outs at the deal stage, including EBITDA definitions, accounting hierarchies, adjustment provisions, information rights and dispute mechanisms, so that the provisions are robust, clear and aligned with your commercial objectives, reducing the risk of disputes arising in the first place.

Contact Us

We will respond to most enquiries with both an indicative scope of work and fee estimate, as well as the offer of a complimentary 20-minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.

In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 and £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified).

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. We first need an overview of the background and your issues, together with any significant documents, to provide an indicative scope of work and fee estimate.

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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.  

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