In many acquisitions, the Acquisition Agreement provides that a portion of the purchase price will be paid after Closing through an earnout if the Company satisfies specified Revenue, EBITDA, or other performance targets. Because the Buyer controls the Company after Closing, the Buyer also controls many operating and accounting decisions that determine whether the earnout target is achieved. The earnout provisions in the Acquisition Agreement therefore should identify the Buyer-controlled decisions that may affect the earnout calculation, preserve legitimate Buyer business judgment, establish how performance will be measured, and provide the Seller with information rights and remedies to verify and enforce any Earnout Payment.
Assume the Acquisition Agreement provides that the Seller will receive an additional $500,000 of purchase price for each of the next 3 years in which the Company generates at least $10 million of Revenue. The Company is on track for $10.4 million of Revenue during year 1. If the Buyer delays a $1.2 million customer contract from December until January, year 1 Revenue falls to $9.2 million and the Seller receives no $500,000 payment for year 1. If the Buyer instead redirects an $800,000 customer relationship to a Buyer affiliate and Revenue generated by the affiliate does not count toward the earnout calculation, year 1 Revenue falls to $9.6 million and the Seller again receives no $500,000 payment. The economic value of the earnout therefore depends not only on the stated Revenue target, but also on how the Acquisition Agreement governs Buyer-controlled decisions after Closing.
The drafting objective is not to require the Buyer to operate the Company for the Seller’s benefit. The Acquisition Agreement instead should distinguish legitimate Buyer business decisions from Buyer-controlled conduct or calculations that may improperly reduce the contingent purchase price.
Why Does Buyer Control Change the Value of an Earnout?
After Closing, the Buyer may control pricing, staffing, customer relationships, budgets, product priorities, accounting practices, and contract timing. The Buyer has a legitimate interest in integrating the Company, changing unprofitable practices, reallocating personnel, and pursuing opportunities that benefit the combined business. The Seller, however, remains economically exposed to Buyer-controlled operating and accounting decisions because the Seller receives additional purchase price only if the Company satisfies the negotiated earnout target.
The Acquisition Agreement therefore must allocate the tension between Buyer operating control and Seller earnout protection. A Buyer-favorable provision may preserve broad operating discretion except for actions taken in bad faith or primarily to avoid the Earnout Payment. A more Seller-protective provision may restrict specified actions, require defined efforts, preserve specified resources, or require operation consistent with an agreed business plan. Failure to achieve the Revenue, EBITDA, or other earnout target should not, by itself, establish a Buyer breach because ordinary business risks may prevent achievement even when the Buyer complies with the Acquisition Agreement.
Delaware decisions generally enforce the operating allocation the parties negotiate. STX Business Solutions, LLC v. Financial-Information-Technologies, LLC enforced broad Buyer discretion despite the effect on the earnout, while Georgia Security Solutions LLC v. NewCBN, LLC allowed express covenant, calculation, and information-access claims to proceed where the Acquisition Agreement imposed specific operating covenants and information-access obligations.
STX and Georgia Security show that the Revenue or EBITDA target and the earnout operating covenants perform different functions. The Revenue or EBITDA target determines when contingent purchase price becomes payable, while the earnout operating covenants determine whether Buyer-controlled decisions may lawfully change the performance used to calculate the Earnout Payment. A Seller therefore should not rely on the Revenue or EBITDA target itself as protection against Buyer-controlled conduct after Closing.
Which Post-Closing Operating Covenants Matter Most?
If the Acquisition Agreement conditions additional purchase price on the Company achieving a Revenue target, the earnout provisions should address the Buyer-controlled decisions most likely to move Revenue into, out of, or beyond the measurement period. Pricing, discounts, customer allocation, bundled sales, affiliate transactions, sales staffing, contract timing, returns, acquisitions, divestitures, and Revenue generated through another Buyer entity can all change the Revenue credited toward the Earnout Payment without changing the underlying commercial value of the customer relationship.
If the Acquisition Agreement conditions additional purchase price on the Company achieving an EBITDA target, the earnout provisions also must determine which Buyer-controlled expenses reduce EBITDA. Assume the Company generates $2.3 million of EBITDA before Buyer integration charges and the Acquisition Agreement requires $2 million of EBITDA for a $500,000 Earnout Payment. If the Buyer allocates $700,000 of integration costs, corporate overhead, or management fees to the Company, reported EBITDA falls to $1.6 million and the Seller loses the entire $500,000 Earnout Payment. The Acquisition Agreement should state whether integration costs, corporate allocations, management fees, financing costs, restructuring expenses, transaction expenses, and post-Closing accounting changes reduce EBITDA.
The Acquisition Agreement also should address conduct that can alter the earnout outside the financial formula, including diversion of customers or opportunities to Buyer affiliates, acceleration of expenses, delay of contracts or Revenue beyond the measurement date, discontinuation of identified products, or reallocation of key personnel. The Buyer should retain flexibility for bona fide business decisions, but the Seller should know which decisions may change the contingent purchase price.
Is a Commercially Reasonable Efforts Covenant Enough?
A commercially reasonable efforts covenant can limit Buyer discretion, but the Acquisition Agreement should state what the Buyer must use efforts to accomplish and how performance will be measured. The parties can use the Buyer’s treatment of comparable businesses or products, an objective industry standard, an agreed business plan, or specific obligations such as maintaining identified personnel or funding an agreed marketing budget.
Johnson & Johnson v. Fortis Advisors LLC affirmed breach findings for the remaining regulatory milestones under an efforts standard tied to the Buyer’s usual practices for comparable priority medical devices. By contrast, Meyers v. Zimmer Biomet Holdings, Inc. dismissed an efforts claim where the agreement did not define commercially reasonable efforts and the plaintiff failed to identify an adequate contractual or industry benchmark.
A commercially reasonable efforts covenant therefore should identify both the contractual objective and the standard for measuring the Buyer’s conduct. Without a defined Buyer-practice, industry, business-plan, or other benchmark, the Seller may be unable to show that reduced staffing, budgets, marketing support, or other Buyer decisions violated the Acquisition Agreement rather than merely producing an unsuccessful business result.
Does Keeping the Seller Employed Solve the Control Problem?
Continued employment can preserve customer relationships, operating knowledge, and visibility into the Company, but employment does not necessarily give the Seller control over budgets, pricing, personnel, contracts, accounting, or strategy. The Buyer may retain all material operating authority, and the Seller may be terminated before the earnout period ends.
If the Seller’s continued service is expected to contribute materially to the earnout, the Acquisition Agreement and employment agreement should address termination without cause, resignation for good reason, and a material reduction in authority. The parties may provide for continued measurement, deemed achievement, acceleration of a specified amount, or another negotiated consequence so that termination of the Seller’s employment does not unintentionally eliminate or accelerate contingent purchase price.
How Should the Earnout Be Calculated and Verified?
Because the Acquisition Agreement determines the Earnout Payment by applying an agreed formula to post-Closing performance, the earnout provisions should define exactly how Revenue, EBITDA, or another performance measure is calculated. The Acquisition Agreement should address Revenue recognition timing, cash collection versus Revenue recognition, affiliate transactions, bundled sales, acquisitions and divestitures, integration expenses, corporate allocations, and transaction-specific exclusions that could materially affect the Earnout Payment.
The Acquisition Agreement also should establish the accounting hierarchy. If transaction-specific rules, an illustrative schedule, historical practices, and GAAP can produce different Earnout Payments, the Acquisition Agreement should state which source controls. The Buyer should not be able to change an accounting policy after Closing solely to reduce the Earnout Payment. No integration cost, corporate allocation, reserve, or other item should reduce the earnout calculation more than once unless the Acquisition Agreement expressly requires multiple effects.
Because the Buyer controls the Company’s books after Closing, the Seller needs contractual access to the information used to prepare the earnout calculation. The Acquisition Agreement should require the earnout statement and supporting records reasonably necessary to test the calculation, including relevant general ledger detail, customer and sales reports, allocation schedules, and workpapers. The Seller also should have a defined objection period and receive any undisputed Earnout Payment while disputed items are resolved.
How Should Earnout Disputes and Remedies Be Structured?
The Acquisition Agreement should distinguish technical calculation disputes from disputes over Buyer conduct or contract interpretation. An independent accountant may determine whether Revenue or EBITDA was calculated correctly under the agreed methodology, while a court or arbitrator should generally decide whether the Buyer breached an operating covenant, diverted Revenue, changed agreed accounting rules, or failed to provide required records. If the accounting calculation depends on a threshold contractual ruling, the Acquisition Agreement should establish which decision maker acts first.
The Acquisition Agreement also should specify what happens if the Buyer breaches an earnout operating covenant, calculation rule, information-access obligation, or other earnout provision. A calculation error may require payment of the corrected Earnout Payment with interest, while Buyer conduct that prevents the Revenue, EBITDA, or other earnout target from being measured as agreed may justify deemed achievement, extension of the earnout period, acceleration of an agreed amount, or expectation damages.
Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc. illustrates the potential exposure: after finding a breach of an express commercially reasonable efforts obligation tied to milestone payments, the Court of Chancery awarded approximately $180.9 million in expectation damages.
The Acquisition Agreement should therefore state how contingent consideration will be valued or deemed achieved when Buyer conduct prevents the parties from directly observing whether the earnout target would have been satisfied. A Seller should not be left to prove an unknowable performance result after a Buyer breach has made the contractual performance path impossible to reconstruct.
Conclusion
An earnout makes part of the Seller’s purchase price depend on results produced while the Buyer controls the Company. The Acquisition Agreement therefore should identify the Buyer-controlled decisions that may affect the Revenue, EBITDA, or other earnout target and establish the operating covenants, calculation rules, accounting hierarchy, information rights, dispute procedures, and remedies governing the Earnout Payment.
For the Buyer, the objective is legitimate operating flexibility without turning every missed target into a contractual claim. For the Seller, the objective is preventing Buyer-controlled decisions or calculations from changing the contingent purchase price without an enforceable contractual standard. The Acquisition Agreement must allocate Buyer operating discretion, Seller earnout protection, calculation authority, information access, dispute resolution, and remedies before the Seller gives up control.
By Joseph R. Luna
Primary Authorities
STX Business Solutions, LLC v. Financial-Information-Technologies, LLC, C.A. No. 2024-0038-JTL (Del. Ch. Oct. 31, 2024), aff’d, No. 494, 2024 (Del. June 25, 2025).
Georgia Security Solutions LLC v. NewCBN, LLC, C.A. No. 2025-0798-JTL (Del. Ch. Aug. 3, 2026).
Johnson & Johnson v. Fortis Advisors LLC, 352 A.3d 229 (Del. 2026).
Meyers v. Zimmer Biomet Holdings, Inc., C.A. No. 2025-0732-BWD (Del. Ch. May 1, 2026).
Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., 341 A.3d 513 (Del. Ch. 2025).