How to Draft a Earn-Out Agreement (2026 Template and Clauses)

An earn-out is a part of a deal price that the buyer pays the seller later, only if the acquired business hits agreed targets after completion. It bridges a gap in value: the seller believes the business will perform, the buyer is not sure, so part of the price is tied to actual results. The earn-out agreement, usually a section of the sale agreement or a schedule to it, sets the rules. This guide explains how earn-outs work, the clauses that cause most of the fights, and gives a skeleton you can adapt. It is written for founders selling a business, buyers and in-house teams. It is general guidance, not legal advice, and earn-outs always need tax and accounting input as well as drafting. ## What an earn-out does, and why it is risky An earn-out defers part of the consideration and makes it conditional on performance over an earn-out period, usually one to three years. If the business hits the targets, the seller gets the extra payment; if it does not, the seller gets less or nothing. The idea is elegant, but earn-outs are among the most disputed parts of any deal, because after completion the buyer controls the business and the seller's payment depends on how it is run. Most earn-out disputes come down to the same tension: the seller wants the business run to maximise the metric, the buyer wants to run it for the long term. Good drafting anticipates that tension rather than papering over it. ## The decisions that drive the drafting Before drafting, the parties must agree: - The metric. Revenue, gross profit, EBITDA, units, user numbers, or a milestone such as a regulatory approval. Simpler, harder-to-manipulate metrics cause fewer disputes. Revenue is simple but easy to inflate at the cost of margin; EBITDA is closer to value but easier to argue about.

• The period. How long the earn-out runs. Longer periods give more time to perform but more room for the business to change.
• The formula. How the payment is calculated from the metric: a threshold, a cap, and whether it is a cliff (hit the target or get nothing) or a sliding scale.
• The protections. What the seller can require the buyer to do, or not do, so the metric is not undermined. ## The core structure of an earn-out agreement ### 1. Definitions Define the earn-out period, the earn-out metric and exactly how it is calculated, the accounting policies to be used, the targets, the maximum earn-out amount and the payment dates. Precision here prevents most disputes. ### 2. The earn-out calculation Set out the formula clearly, ideally with a worked example in a schedule. State the threshold below which nothing is paid, the cap, and whether payment steps up in bands or on a straight line. ### 3. Accounting and measurement Specify the accounting policies, consistent with past practice, used to measure the metric, how one-off items are treated, and how intra-group or related-party transactions are handled so the metric is not distorted. ### 4. Preparation and review of the earn-out statement Say who prepares the statement of the metric, by when, what access the seller has to the figures, how the seller can object, and how a dispute over the numbers is resolved, often by an independent accountant acting as expert. ### 5. Conduct of the business (the protective covenants) The most negotiated part. The buyer agrees how it will run the business during the earn-out, for example to run it as a separate unit, not to divert sales to affiliates, to maintain agreed resources, and not to take action for the main purpose of reducing the earn-out. Buyers resist tight restrictions, so the balance here is the heart of the deal. ### 6. Acceleration and change of control Provide what happens if the buyer sells the business, materially restructures it, or the seller leaves, often the earn-out accelerates or is treated as met, so the buyer cannot defeat it by changing the business. ### 7. Payment and set-off Set out when and how the earn-out is paid, and whether the buyer can set off warranty or indemnity claims against it. ### 8. Seller's employment link Earn-outs often depend on the seller staying to run the business. Address what happens if the seller is a good leaver or bad leaver, and keep the earn-out and any employment terms consistent. ### 9. Tax and boilerplate Flag the tax treatment of the earn-out, which can differ from the upfront price, and add dispute resolution, notices, governing law and counterparts. ## A usable earn-out skeleton ```

1. Definitions (period, metric, accounting policies, targets, cap, payment dates)
2. The earn-out calculation (threshold, cap, bands, worked example)
3. Accounting and measurement rules
4. Earn-out statement: preparation, access, objection, expert determination
5. Conduct of the business during the earn-out (protective covenants)
6. Acceleration on sale, restructuring or change of control
7. Payment timing and set-off
8. Seller employment link; good and bad leaver
9. Tax treatment, dispute resolution, notices, governing law

- **No conduct covenants.** Without rules on how the buyer runs the business, the seller is at the buyer's mercy. Negotiate real protections.
- **No acceleration on a sale.** If the buyer can sell or restructure the business and walk away from the earn-out, the seller loses. Add acceleration triggers.
- **Unclear dispute route.** Always provide an independent expert to decide disputes over the numbers, with a clear timetable.
- **Earn-out and employment out of step.** If the earn-out depends on the seller staying, align the leaver provisions in both documents. ## Drafting, reviewing and tracking an earn-out in one place An earn-out lives across the sale agreement, its schedules, the accounting policies and, often, an employment agreement, and it runs for years after completion with real dates: the measurement period, the statement deadline, the objection window and the payment date. When the agreement sits in one place and those dates in a diary, the mechanics drift and deadlines slip. Keeping the draft, the clause-level review and those dates in one workspace keeps the earn-out honest. [Adira](https://adiralaw.com) is one such workspace, built on frontier AI, where you can draft the earn-out from a brief, see each metric, conduct and acceleration clause marked favourable, neutral or unfavourable to your side, link the earn-out to the sale agreement and any employment file, and track the measurement period, statement deadline and payment dates as alerts. The formula and the dates that trigger payment stay connected. Get the metric, the conduct covenants and the acceleration triggers right, and most earn-out disputes never start.