After closing, the buyer runs the business your earn-out depends on

An earn-out hands the buyer the controls and then asks you to trust the readout. Delaware courts enforce the operating covenants you negotiated and almost none of the ones you did not. Collectible contingent consideration comes from separate accounting, capped overhead, protected people, a short measurement window, and express acceleration.

Why do earn-outs fail when the buyer has not breached anything?

Earn-outs fail without a breach because the buyer controls every input to the measured number. The buyer’s objective is long-run profit across everything it owns. Your objective is maximum measured profit inside a short window. Those objectives diverge on overhead, intercompany pricing, staffing, reserves, and capital spending. The buyer decides all five.

The rule is simple. After closing the business is the buyer’s property, and the buyer may run it in its own interest, limited only by the covenants you wrote and a narrow implied duty of good faith. The application is where sellers get hurt. A buyer building a platform for year three spends in year one, hires slowly, takes reserves early, consolidates back-office functions. Each choice is defensible management. Each lowers the number your payment depends on. You can lose the earn-out entirely while the buyer does nothing you could call misconduct.

Which buyer decisions quietly destroy an earn-out?

The buyer decisions that destroy an earn-out are ordinary management moves: folding the business into the buyer’s operations, allocating overhead and management fees, repricing intercompany sales, moving key salespeople, deferring revenue, accelerating expense, cutting funding. Each can be lawful absent a covenant. Each moves the measured result.

What does Delaware law require a buyer to do during the earn-out period?

Delaware law requires the buyer to do what the purchase agreement says, and very little more. The implied covenant of good faith and fair dealing fills genuine gaps in a contract. It does not impose a duty to maximize your earn-out. It will not supply the operating obligations you failed to negotiate.

Check one thing first. Delaware law reaches your deal only if the governing-law clause says so, or if the fight involves a Delaware entity’s internal affairs. Other states borrow this reasoning often, not uniformly. Confirm the rule where your agreement sends you.

Start with the rule. The implied covenant asks whether it is clear from what the parties expressly agreed that they would have prohibited the conduct now complained of, had they addressed it. It fills gaps. It does not rewrite the bargain.

Law: Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986); Nemec v. Shrader, 991 A.2d 1120 (Del. 2010).

Now the application. In the Harmonix earn-out the sellers argued the buyer had a duty to renegotiate a distribution agreement because doing so would have raised their payment. The Court of Chancery rejected the claim as a matter of law, saying the covenant “is not a license for a court to make stuff up.” The Supreme Court affirmed.

Law: Winshall v. Viacom International, Inc., 55 A.3d 629 (Del. Ch. 2011), aff’d, 76 A.3d 808 (Del. 2013).

Next, the drafting trap that costs sellers most. In the Cyveillance deal the agreement did contain a conduct covenant: the buyer could not divert or defer revenue with the intent of reducing the earn-out. Forty million dollars was paid at closing, with up to forty million more on revenue targets. The targets were missed. After trial the court held the seller had not proven any decision was motivated by a desire to avoid the payment. Knowledge was not intent. The seller collected nothing.

Law: Lazard Technology Partners, LLC v. QinetiQ North America Operations LLC, 114 A.3d 193 (Del. 2015).

An intent standard makes you prove what the buyer was thinking. A spend floor makes you prove a number. Draft toward the number.

Sellers do sometimes survive. Where a buyer allegedly diverted clients and employees to a different subsidiary, the Court of Chancery let the implied covenant claim past a motion to dismiss. That is permission to litigate, not a judgment. The same decision dismissed the complaint about unmade systems changes and confirmed there is no duty to maximize revenue absent an express efforts covenant.

Law: American Capital Acquisition Partners, LLC v. LPL Holdings, Inc., 2014 WL 354496 (Del. Ch. Feb. 3, 2014).

Two more lessons. Silence about spending means you bear the risk that the buyer spends nothing. An express commercially reasonable best efforts covenant gave another seller a real claim over staffing, inventory, and product decisions.

Law: Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126 (Del. Ch. 2009); Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (Del. Ch. Jan. 30, 2015).

Expect the buyer’s draft to go further than silence. Many add an express disclaimer that the buyer may run the business in its sole discretion with no duty to maximize the earn-out. That sentence closes the gap the covenant would fill.

Silence in the purchase agreement is not neutral. Silence is a grant of discretion to the party holding the controls.

Which operating covenants make contingent consideration collectible?

The covenant package that makes contingent consideration collectible has eight working parts: separate existence, a real financial-reporting obligation, an ordinary-course operating standard, key-employee protection, consent rights, an overhead cap, committed sales and marketing spend, and information and audit rights. Acceleration on a change of control sits behind all eight.

• Separate existence. Own customers, contracts, and general ledger for the whole period. Without it the metric becomes uncomputable and your remedy an argument.
• Reporting capability. A system that separately accounts for each measured item, in place before the first earn-out year begins, plus statements due on a stated deadline.
• Ordinary-course standard. The business is run consistent with past practice in all material respects. Buyers resist this hardest; it converts management choices into breach questions.
• Key-employee protection. Name the two or three people who produce revenue. Address termination, reassignment, territory, and pay-plan changes.
• Consent rights. Over acquisitions folded into the business, reclassified revenue or expense lines, and policy changes. Buyers resist a veto; the fallback is notice plus a target adjustment.
• Overhead cap. Cap allocated overhead and management fees, but know the tradeoff: a stated cap becomes the actual charge. Excluding charges absent from closing-date financials is stronger.
• Committed spend. A floor on sales and marketing expense, in dollars or as a percentage of trailing twelve-month revenue.
• Information and audit rights. Access to books, workpapers, and people, plus one audit a year at your cost, refunded if it moves the number past a stated margin.

Set expectations, stated as of August 2026. Earn-out frequency statistics compiled from publicly filed acquisition agreements describe deals far larger than an owner-operated sale and are no benchmark for yours. In a sale this size the earn-out usually bridges the buyer’s financing gap, not a disputed forecast, and large-deal dispute machinery costs more than it protects.

How do you make sure the earn-out number can even be produced?

An earn-out number can be produced only if the measured items are defined by reference to documents that already exist. Tie each metric to specific line items in the closing-date financial statements. Freeze the accounting policies behind them. Then require the buyer to report against those same line items on a fixed schedule.

Prefer a metric that is hard to manipulate. Revenue or defined gross profit moves with fewer levers than net profit; every layer below gross profit is one the buyer controls. If the buyer insists on a profit metric, define it as a closed list and exclude anything off the list.

Then build the dispute mechanism into the schedule. Name the accounting firm that resolves disagreements, give it a deadline from its engagement, limit it to the disputed items, and require interest on any amount withheld and lost. Making that determination final has a price: courts generally enforce it and will not retry the arithmetic. State also that if no statement arrives, the payment is due on your calculation absent a timely objection.

What happens if the buyer sells, merges, or absorbs the business mid-earn-out?

If the buyer sells, merges, or absorbs the business during the earn-out period, the metric usually becomes impossible to compute and your payment turns into an argument you may not win. The obligation survives. The measurement does not. Acceleration fixes that: the remaining consideration falls due on stated events, by a formula written at signing.

Draft the trigger list broadly:

• Change of control of the buyer or the business, or a sale of its assets.
• Integration, discontinuation, or relocation, or cessation of separate books.
• Termination of your employment or consulting role without cause.
• Material breach of an operating covenant, uncured a stated number of days after your notice.
• Failure to deliver an earn-out statement a stated number of days after the period ends.

Then write the deemed-performance formula: the full remaining amount, a pro rata figure by elapsed time, or the annualized run rate achieved. Sellers do best with a “greater of” between the pro rata and run-rate figures. Fix the number by arithmetic, not later testimony. Say expressly that the obligation binds successors and assigns and when the accelerated amount is payable.

What if the buyer will not accept any conduct covenants at all?

If the buyer refuses conduct covenants, stop negotiating conduct and negotiate structure instead. Two levers remain: shorten the measurement period, and get express acceleration. A twelve-month window on a revenue metric exposes you to far fewer buyer decisions than three years on net profit does. Shorter and simpler beats longer and richer.

Also move consideration forward. Contingent value the buyer will not let you protect should be priced as a discount and converted into cash at closing or a seller note with fixed dates. A note is a debt with a due date. An earn-out is a forecast with a referee.

Then deal with the damages problem, where sellers who win still lose. Proving breach is one case. Proving what the business would have earned but for the breach is a second and harder one. A business that thrives just after the period closes proves nothing, because the contract measured a window and the window shut. So write the remedy at signing: a stipulated amount tied to the deal’s own numbers, plus interest, plus fee-shifting. Know the limit. A stipulated sum holds up only if it satisfies the governing state’s liquidated damages test, and a figure a court reads as a penalty can be struck. Ask that before you pick the governing law, because you can win the argument and collect nothing.

Finally, ask who owes the money. If the buying entity is a new holding company with no assets, the earn-out is a promise from a shell. A parent guaranty, an escrow, or a setoff right against amounts you owe makes it collectible. Then check the mirror image, because buyers routinely set indemnity claims off against your earn-out: limit that to claims finally resolved, not merely asserted.

What should you do before you sign the earn-out schedule?

Before you sign the earn-out schedule, do four concrete things. They take days, not months. Done in order, they tell you whether the contingent portion of your price is real money or a story, and they surface the covenants you still need while there is time to trade for them.

• Pull three years of your own profit and loss statements and mark the exact line items your metric uses. If you cannot point to the line, the buyer’s accountants define it later.
• List every lever the metric exposes, and for each write the covenant that answers it. If a lever has no covenant, either the metric changes or the money moves to closing.
• Ask the buyer, in writing, about integration: which functions move to shared services, when, what gets charged back, and whether its system can report your business separately today.
• Model a bad but honest scenario: overhead at the cap, your top producer reassigned, marketing flat. If the payment goes to zero on ordinary decisions, it is not a payment.

Bring your accountant into the earn-out drafting, not just the diligence. And ask your tax adviser, before the structure is fixed, how the deferred payments are taxed: as of August 2026, contingent consideration is treated differently from cash paid at closing, and amounts tied to your continued employment can be challenged as compensation rather than purchase price.