An earnout dispute is avoided by defining the metric and its calculation methodology in exact, unambiguous terms, replacing vague "commercially reasonable efforts" language with specific buyer obligations, adding operating covenants that protect the seller from post-closing interference, and routing disputes to a named accounting expert with clearly bounded authority and a strict deadline. Get any one of those four wrong and you've built a contract that's more likely to end up in front of a judge than pay out as intended.
This guide covers each drafting decision in detail, then walks through five real, verified Delaware court cases, including one decided this year involving a buyer's deleted AI chatbot conversations, that show exactly what happens when they're gotten wrong.
Key takeaways
- As Vice Chancellor J. Travis Laster put it in a 2009 Delaware Chancery opinion, "an earn-out often converts today's disagreement over price into tomorrow's litigation over the outcome." Ambiguity in the earnout clause is what makes that prediction come true.
- Full payment is the exception, not the rule. SRS Acquiom's deal-terms data shows roughly 21 cents paid out for every dollar of potential earnout value across private-target deals.
- Revenue has overtaken EBITDA as the more common earnout metric (roughly 62% of deals versus 22%) precisely because it's harder for a buyer to manipulate through post-closing accounting choices.
- Earnouts run proportionally larger on sub-$25 million deals than on bigger ones, so getting the drafting right matters more, not less, at the deal size most Clef buyers operate in.
- A buyer that fires the seller's management team or seizes operational control to avoid an earnout payout is not just ethically dubious, it's a real, decided breach of contract, per a March 2026 Delaware Chancery ruling.
Why Earnouts Turn Into Lawsuits
The root cause is almost always the same: ambiguity in what the buyer owed the seller, combined with the buyer retaining control over the very numbers the payment depends on.
In Airborne Health, Inc. v. Squid Soap, LP, a 2009 Delaware Chancery case involving a $1 million cash deal with up to $26.5 million in potential earnout payments, the agreement never pinned down exactly what resources the buyer had to commit to marketing the acquired brand. Vice Chancellor Laster's line from that opinion has become the standard reference point in this area of law: "an earn-out often converts today's disagreement over price into tomorrow's litigation over the outcome." The buyer sets the price it's willing to pay contingent on future performance, the seller accepts a bet on that performance, and if the clause defining what counts as performance (or what the buyer had to actually do to help achieve it) is vague, the parties simply haven't finished negotiating. They've just moved the fight to after closing.
The Real Cost of a Vague Earnout, in Numbers
Vague earnout language doesn't just risk a lawsuit. It risks the payment itself, and the data on how often earnouts actually pay out should reset expectations on both sides of a deal.
SRS Acquiom's ongoing deal-terms research, drawn from private-target transactions, finds that only about 21 cents of every potential earnout dollar is ultimately paid out. In life sciences deals specifically, where earnouts are most common, only around 9.5% of milestone value has been paid since 2008. Earnouts have also grown larger relative to the deal: SRS Acquiom's data shows median earnout potential running roughly 32% to 34% of the closing payment in recent years, and proportionally about double that on deals under $25 million compared to larger transactions, which is exactly the deal-size range most Clef buyers operate in. How often earnouts get used at all is a genuinely contested number: SRS Acquiom's 2025 data puts usage at about 24% of private-target deals, while the American Bar Association's 2025 Private Target Deal Points Study puts it closer to 18%, the lowest share it's recorded since 2006. Different samples, different methodologies, but the same underlying signal: earnouts are a meaningful piece of deal value that frequently doesn't land the way either side expected.
Pick a Metric That Can't Be Argued About
The short answer: choose the metric that's hardest for the buyer to move after closing, and define exactly how it's calculated before you sign.
Revenue has become the more common primary earnout metric, used in roughly 62% of deals versus about 22% for EBITDA, precisely because EBITDA is far easier for a buyer to manipulate through overhead allocation, expense timing, or accounting-policy changes once they're running the business. Many deals now blend metrics rather than relying on just one. Whichever you choose, the calculation methodology needs to be spelled out in the agreement itself: what's included, what's excluded, which accounting standard applies, and whether one-time items get backed out. A one-sentence metric definition is where most disputes are actually born.
Write the "Efforts" Standard Like You Mean It
The short answer: "commercially reasonable efforts" is not a magic phrase that guarantees the seller gets a fair shot at the earnout. Courts read it narrowly, and buyer discretion baked elsewhere into the agreement can gut it entirely.
In Himawan v. Cephalon, Inc. (Del. Ch. C.A. No. 2018-0075-SG, decided April 30, 2024), the Delaware Court of Chancery examined an earnout tied to FDA approval milestones for an antibody drug, governed by a commercially reasonable efforts standard. The court held that where the merger agreement gave the buyer broad discretion over how to run the business, that efforts standard only barred conduct against the buyer's own self-interest. It did not require the buyer to match a competitor's effort level or solve every problem that arose. The lesson for a seller: broad, undefined buyer discretion elsewhere in the agreement can quietly neutralize an efforts clause you're counting on. If you want real protection, negotiate specific, objective commitments (minimum spend, defined activities, a staffing floor) rather than trusting "commercially reasonable efforts" alone to carry the weight.
Lock Down Operating Covenants Before You Hand Over the Keys
The short answer: an earnout is worthless if the buyer can undermine the business's performance and still walk away clean, so the operating covenants matter as much as the payment formula.
This is not a hypothetical risk. In Fortis Advisors, LLC v. Krafton, Inc. (Del. Ch. C.A. No. 2025-0805-LWW, decided March 16, 2026), Krafton acquired the studio behind the video game Subnautica for $500 million upfront plus up to $250 million in earnout payments, with a contractual guarantee that the founding CEO would retain operational control unless terminated for cause. As the earnout looked likely to trigger, Krafton's CEO consulted an AI chatbot for strategies to avoid the payout, an internal task force was formed, and the studio's founders were fired without a contractually valid cause while the buyer seized operational control. The CEO's own deleted chatbot conversations were recovered and became central evidence at trial, since they weren't privileged communications. The court found Krafton breached the agreement, reinstated the CEO with full authority, and equitably extended the earnout measurement period by 258 days to make up for the time lost during his wrongful removal. Whatever your deal size, the takeaway is the same: negotiate specific, narrow definitions of "cause" for any termination during the earnout period, and prohibit the buyer from making structural changes, staffing cuts, or strategic shifts that would predictably suppress the metric the earnout is measured against.
Build a Dispute-Resolution Clause With Teeth (and Clear Limits)
The short answer: route narrow accounting disputes to a named independent expert with a deadline, and reserve broader contract disputes for arbitration or the courts, but say explicitly in the clause which disputes go where.
A vaguely scoped expert-determination clause creates its own fight over what the expert is even allowed to decide. In Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC (166 A.3d 912 (Del. 2017)), a related purchase-price-adjustment dispute rather than a pure earnout, the Delaware Supreme Court made clear that an expert-determination clause cannot be stretched to let a party relitigate due-diligence assumptions the clause was never meant to cover. The practical fix: name the expert's exact scope of authority in the agreement (a specific calculation dispute, not "any disagreement"), require both sides to submit competing calculations with supporting workpapers, set a firm decision deadline, and state plainly that the expert's ruling on the defined calculation issue is final while everything else is not.
Give the Seller Real Visibility: Reporting and Audit Rights
Sellers who can't see the numbers during the earnout period find out too late that something's off, so a right to regular financial reporting and a limited audit right belong in every earnout agreement.
At minimum, negotiate monthly or quarterly financial statements covering the metric being tracked, a right to ask reasonable follow-up questions, and a limited right to have an independent accountant review the underlying books once during the earnout period if a real discrepancy is suspected. This isn't about distrust as a starting posture. It's about making sure the first time a seller learns the earnout is falling short isn't the day the final payment calculation arrives.
Set the Term, the Triggers, and the Acceleration Events
State plainly how long the earnout period runs, what specific event triggers each payment, and what happens if the buyer sells the business or has a change of control before the period ends.
An acceleration clause, paying out some or all of the remaining earnout immediately if the buyer sells the acquired business, is one of the most important protections a seller can negotiate and one of the most commonly missing. Without it, a buyer can flip the business mid-earnout to a new owner with no obligation to honor the original performance targets, leaving the seller with a claim against a company that no longer controls the asset.
Cap, Floor, or Both? Bounding the Range of What You Can Fight About
Structuring the payment as tiered thresholds with a defined floor and ceiling, rather than a single all-or-nothing target, narrows what the parties can actually dispute.
LeMaitre Vascular's 2020 acquisition of Artegraft is a useful real-world template: $65 million cash at closing, a $7.5 million escrow, and up to $17.5 million in earnout structured as three separate annual unit-sales thresholds for 2021 through 2023, each strictly all-or-nothing. But the agreement also included a cumulative catch-up provision: if three-year combined sales reached 80% of the combined target, a prorated payment kicked in even after individual annual thresholds were missed (which, per public filings, happened in both 2021 and 2022). That structure gives a seller a meaningful shot at partial recovery even through a rough early stretch, while still giving the buyer clear, objective thresholds rather than a single subjective judgment call.
Five Real Court Cases That Show What Goes Wrong
| Case | Year | The failure |
|---|---|---|
| Airborne Health v. Squid Soap | 2009 | Vague commitment to marketing resources behind a $26.5M earnout |
| Himawan v. Cephalon | 2024 | Broad buyer discretion neutralized the "commercially reasonable efforts" standard |
| UMB Bank v. Sanofi (Genzyme CVR) | 2019 settlement | Buyer accused of under-marketing an acquired drug that competed with its own product; settled for $315M |
| SRS v. Alexion | 2024 | Buyer shelved the earnout-linked program after being acquired itself; found to breach efforts obligation |
| Fortis Advisors v. Krafton | 2026 | Buyer fired the seller's CEO and seized control to dodge a $250M earnout; reinstated with an extended earnout period |
A Pre-Signing Earnout Checklist
Before you sign, confirm each of these is addressed in writing, not assumed: the metric and its exact calculation methodology; whether the efforts standard is objective and specific or reads outward versus inward; operating covenants restricting staffing cuts, budget cuts, or strategic changes that would suppress the metric; a defined, narrow scope for the dispute-resolution expert with a firm deadline; monthly or quarterly reporting rights plus a limited audit right; an acceleration clause covering a sale or change of control; and tiered thresholds with a catch-up mechanism rather than a single cliff. For the broader picture of how earnouts compare to other structures and how SBA financing rules interact with them, see our guide on earnout structures in SMB acquisitions.
None of this drafting work matters until you have a real deal to apply it to. Clef aggregates more than 120,000 business-for-sale listings from brokers and marketplaces into one searchable feed, with an AI assistant to help you screen a listing and a deal pipeline to track your negotiations across every acquisition you're evaluating. Start your search on Clef and bring a contract that actually protects both sides to your next LOI.
Frequently asked questions
What causes most earnout disputes?
Most earnout disputes trace back to ambiguous metric definitions (what counts in EBITDA or revenue), vague commercially reasonable efforts language describing the buyer's obligations, and buyer decisions after closing, like reorganizations, cost cuts, or management changes, that affect the numbers the earnout is measured against.
What percentage of earnouts actually get paid in full?
Full payment is the exception, not the rule. SRS Acquiom's deal-terms data shows roughly one out of every five potential earnout dollars actually gets paid across private-target deals overall, and in life sciences specifically only about 9.5% of milestone value has been paid out since 2008.
Can a buyer be sued for interfering with an earnout?
Yes. In Fortis Advisors, LLC v. Krafton, Inc. (Del. Ch. 2026), the Delaware Court of Chancery found the buyer breached its acquisition agreement by removing the target's CEO and key executives without contractual cause and seizing operational control as a $250 million earnout approached its trigger, and ordered the CEO reinstated and the earnout period extended.
Should an earnout use EBITDA or revenue as the metric?
Revenue is now the more common primary metric, used in roughly 62% of deals versus about 22% for EBITDA in recent data, largely because it's harder for a buyer to manipulate through post-closing accounting choices like overhead allocation or expense timing. Many deals now blend multiple metrics rather than relying on just one.
How are earnout disputes typically resolved: court or arbitration?
Well-drafted earnout clauses route narrow, purely accounting or calculation disputes to a named independent accounting expert with a strict deadline, while reserving broader contract-interpretation disputes, like whether the buyer met its efforts obligation, for arbitration or the courts. The clause should say explicitly which disputes go where.