ANALYSIS · Capital

Before You Accept an Earnout, Read It Like a Future Lawsuit

One Delaware case was still drawing a ruling years after its case number suggests it was filed, which in our reading makes the contract wording a seller accepts at signing its most reliable protection.

Rendal Post Analysis Desk · Published October 28, 2026

An earnout lets a buyer and a seller settle a disagreement about value by moving part of the price into the future. An owner offered one wants two answers: how likely it is that the deferred money ends in a fight, and what language keeps it collectible. On the first question, the material this desk reviewed contains no public rate of earnout disputes, and we will not make one up. The second question has a better answer. The Court of Chancery's opinion index shows a case brought by a shareholder representative against Alexion Pharmaceuticals that drew a ruling on post-judgment interest in October 2026, about six years after what its 2020 case number suggests was the filing date. Our thesis follows from that. A seller cannot control whether a dispute happens or how long it runs. It can control the wording that a judge or an accountant will eventually read, and in our reading that wording decides much of the outcome before anyone files suit.

What the data can and cannot say

SRS Acquiom's M&A Deal Terms Study draws on more than 2,300 acquisitions of private companies, together worth $569 billion, with closings spanning 2020 through 2025. The firm lists trends in valuations and earnouts as a key topic of this edition, and the study also covers escrows, purchase price adjustments and indemnification. Its public summary, however, gives no figure for how frequently earnouts end in litigation, which is the number an owner most wants.

Two features of the study shape how a seller should use it. It covers transactions for which SRS Acquiom provided services, so it describes that set of deals rather than every private sale. It also puts earnouts alongside escrows and indemnity, the mechanisms that govern money after closing. In our reading, that is the right way for a seller to think about an earnout: not as upside, but as part of the price that stays exposed to the buyer's decisions and to the contract's definitions.

The practical step is to ask your banker or counsel for the full study instead of relying on the summary. Two figures are worth requesting: how common earnouts were in deals of your size and sector, and what share of the price they represented. If the share in your offer is well above what comparable deals show, the buyer is asking you to carry more of the valuation risk. That is a point to negotiate on price, not only on wording.

The cost of a long docket

The Court of Chancery posts its opinions in a public index, and several entries from October 2026 name parties whose names suggest a link to acquisitions.

On October 15, 2026, Vice Chancellor Zurn issued a letter decision regarding post-judgment interest in Shareholder Representative Services, LLC v. Alexion Pharmaceuticals Inc. The matter carries the number C.A. No. 2020-1069-MTZ, which in our reading points to a filing in 2020. The index does not describe the claims, so we draw no conclusion about the merits. The procedural fact makes the point on its own: a judgment existed, and the parties were still before the court arguing over the interest owed on it.

In our view, this is the cost that never shows up in a term sheet. Once deferred consideration becomes a lawsuit, a payment turns into a claim that can take years, legal fees pile up, and the money is not available for whatever the seller planned to do with it. In our reading, interest on late payments is one of the few terms that makes delay costly for the party that owes.

Other entries use the vocabulary of acquisitions. Patrick Flannery's suit names London Stock Exchange Group, Refinitiv US LLC, Latitude Merger Sub Inc and MayStreet Inc as defendants, and the court issued a memorandum opinion in it the same day. A merger subsidiary among the defendants suggests to us a dispute tied to a transaction, though the listing does not say what is contested. An entity named US INFRA SVCS Buyer, LLC appears as plaintiff against JDB Capital Partners in case 2024-0097-LWW; judging by its name, that suggests to us that buyers also go to court, though the listing does not describe the claims.

Where the wording carries the weight

The sources do not document where earnout disputes begin. What follows is the desk's own view of four drafting points that, in our judgment, decide whether a seller holds an enforceable promise or only a hope.

Start with the efforts promise. When a buyer agrees to use commercially reasonable efforts, or best efforts, toward a milestone, it has made a promise whose content a court may have to fill in later. In our view, a seller is better served by a standard tied to something observable: the effort the buyer gives comparable products in its own portfolio, a minimum budget, a named head count, or a commitment to avoid specific steps that would starve the business.

Next is control. After closing, the buyer runs the company. It can fold the acquired unit into a larger division, reassign its salespeople, change pricing or reallocate overhead. Each of those moves can be sound business and still shift the earnout metric. The seller's protection is an operating covenant: the business stays a separately tracked unit through the measurement period, and the buyer agrees not to take named actions for the purpose of avoiding the payment.

Third is the accounting definition. Revenue and EBITDA sound precise until two finance teams calculate them. A schedule that fixes the accounting principles, says how integration costs and shared overhead are treated, and includes a worked example built on the last audited year gives an independent accountant something concrete to apply if the parties disagree.

Fourth is timing. Milestones tied to a regulatory approval, a product launch or a customer contract depend on events the seller no longer controls. Firm outside dates, a clear rule for a milestone that slips because of the buyer's choices, and a statement on whether partial achievement pays anything all leave less room for argument.

Clauses worth asking for

Beyond those four points, in our judgment several protections are within reach of a mid-sized seller, because each one should cost a good-faith buyer little to grant. The first is information. Ask for regular statements of the earnout metric during the measurement period, access to the underlying books, and an audit right, with the buyer paying for the audit if it turns up a material shortfall. A seller who sees the numbers as they come in can raise concerns while the business can still change course, instead of discovering a gap at the final calculation.

The second is acceleration. If the buyer sells the acquired business, merges it into another unit so the metric can no longer be tracked, or breaches an operating covenant, the remaining earnout should become payable, either in full or under an agreed formula. In our view, the case for it is simple: the seller accepted deferred payment on the understanding that the business would be run a certain way.

The third is a limit on setoff. In our view, without one, a buyer may be able to hold back earnout payments against indemnity claims it has made but not proven. Requiring a final determination before any deduction, or capping the amount that can be withheld, keeps the earnout from turning into a second escrow.

The fourth is a dispute process matched to the question. Disagreements over the calculation belong with an independent accountant working from the agreed schedule and worked example. Claims that the buyer fell short on the promised efforts or broke an operating covenant are legal questions, and they belong in a court the parties pick in advance. If the agreement blurs the two, the parties end up fighting over who decides before they get to what is owed. Finally, add interest on late payments running from the original due date; in our view, it is better settled in the contract than left to later litigation.

What to do before you sign

Start by valuing the offer as if the earnout pays nothing, and decide whether you would take that number. If you would not, the earnout is carrying more weight than it may be able to bear, and the cash portion is where to negotiate. Then ask your adviser for deal-terms data that matches your size and sector, so you know whether the structure on the table is ordinary.

Next, give counsel a short written brief covering the four drafting points and the protections above, and pick the two or three you will not give up. In our reading, a seller has the most leverage before exclusivity is signed, so raise these terms in the letter of intent rather than waiting for the final draft. Ask the buyer to explain in writing how it plans to run the business through the measurement period. A vague answer tells you something too. And keep the Delaware docket in mind: in our reading, a dispute can outlast the team that negotiated the deal. Draft for the person who will open the agreement years from now with no memory of the handshake.