Earn-Out Disputes: Expert Witness UK

What Is an Earn-Out?

An earn-out is a mechanism where part of the purchase price depends on the future financial performance of the acquired business, typically measured over one to three years post-completion. If performance targets are met, the seller receives additional consideration.

Common Earn-Out Disputes

1. The earn-out was not achieved: was this genuine underperformance or did the buyer's conduct prevent it?
2. The earn-out was calculated incorrectly: was the agreed accounting basis applied?
3. The buyer changed the business model, strategy, or management in a way that made achieving the earn-out impossible
4. Revenue or costs were manipulated during the earn-out period to reduce the earn-out payment

The But-For Analysis

The expert constructs a but-for model, showing what the earn-out metrics would have been absent the alleged misconduct or accounting error, and compares it to the actual outcome. This may require modelling multiple scenarios reflecting different assumptions about what would have happened under fair conditions.

Accounting Policy Continuity

SPA earn-out provisions typically require the buyer to maintain consistent accounting policies during the earn-out period. Where the buyer changes policies to reduce reported earn-out metrics, the expert must restate the metrics on a consistent basis and quantify the impact.