An earn-out is a deal structure mechanism in which part of the purchase price is contingent on the target business achieving defined performance milestones after closing — typically measured over 1 to 3 years. Earn-outs are used when buyer and seller disagree on valuation (usually because the seller is projecting future growth the buyer is not yet willing to pay for), or when the business is early-stage, lumpy-revenue, or has significant key-person concentration. Common earn-out triggers include revenue thresholds, EBITDA targets, customer retention rates, or the signing of a key contract. From a buyer's perspective, earn-outs protect against overpaying for performance that has not yet been delivered. From a seller's perspective, an earn-out lets them capture upside if their growth projections prove correct. Earn-outs introduce complexity: the purchase agreement must define accounting methods, buyer operating restrictions, and dispute resolution with great precision. Common disputes arise when a new buyer changes operating decisions that affect the earn-out metric. BC courts have consistently upheld earn-out provisions when clearly drafted. Earn-outs work best when the metric is objective (revenue, not EBITDA) and the seller has meaningful influence over that metric during the earn-out period.
A buyer acquires a Vancouver IT services firm for $1.8 million plus a two-year earn-out of up to $400,000 if EBITDA exceeds $450,000 in each of the next two fiscal years. The seller stays on as a consultant to protect the earn-out. If EBITDA hits $500,000 in year one, the seller collects the full $200,000 year-one tranche.
Deal structure decisions have major tax and liability consequences in Canada. Ali works with your accountant and lawyer to make sure the structure that closes also protects you.