Earn-Out Disputes: Forensic Accounting Evidence Guide
Earn-Out Mechanics
An earn-out ties part of the purchase price to the future financial performance of the acquired business. The SPA specifies the earn-out metrics (typically EBITDA, revenue, or gross profit), the measurement period (usually one to three years), and the payment formula.
Earn-outs are common where the seller and buyer disagree on the target's future performance, or where the seller wishes to participate in upside growth post-completion.
But-For Methodology
The but-for analysis is the core forensic accounting tool in earn-out disputes. The expert constructs a 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, including continuation of the pre-acquisition business trajectory.
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.
Changes in revenue recognition, cost allocation, or capitalisation policies during the earn-out period are common triggers for disputes.
Expert Report Structure
An earn-out dispute expert report should address: the earn-out clause and agreed accounting basis; the actual earn-out metrics achieved; the but-for metrics under alternative scenarios; the impact of any alleged buyer conduct on earn-out achievement; and the quantum of additional earn-out consideration due.
Reports must comply with CPR Part 35 and follow the Ikarian Reefer principles of independence and rigour.
Instruct a Warranty Claim Expert Witness
Connect with qualified forensic accountants specialising in UK M&A disputes. We respond within one business day.