An earnout can make an offer look much more exciting. The exciting number still needs a rulebook.
Part of the price depends on what happens after closing. Your job is to understand what would produce a payment—and how you would check it once somebody else owns the business.
Osler’s Canadian acquisition guide distinguishes future-performance earnouts from adjustments measured at closing. A working-capital adjustment and an earnout may both change the price, but they test different things. Keep them on separate lines.
For the earnout, start with the agreement, its calculation schedules and the payment terms. A ceiling tells you the most that component might produce. It does not tell you what you will receive.
Build a specification you can actually use
In its 2014 commercial explanation, Stikeman Elliott identifies the formula, measurement period, accounting rules and later events as matters to negotiate. Treat these as design choices, not rights that arrive automatically with the word “earnout”.
Start a one-page record with these entries:
What is being measured? Name the business, products or customers included.
What counts as success? A financial measure and an operational milestone are different tests. Specify the calculation and the treatment of new customers or synergies.
Who controls the inputs? Match the calculation schedule to the operating decisions that could change those inputs.
McCarthy Tétrault’s drafting discussion explains why those details deserve express attention.
“EBITDA” is a starting label, not a finished formula. MNP’s earnout explanation highlights how relevant discretionary expenses can affect the result. Record their agreed treatment, along with the testing period, any cap or catch-up provision and the payment date. Do not assume that an annual measurement means an immediate annual payment.
Run three outcomes through the same formula
A spreadsheet is more useful here than another reassuring adjective. McCarthy’s July 2025 drafting guidance recommends foreseeable scenarios and sample calculations. Ask both sides to work the same examples, then explain any difference before treating the wording as settled.
Here is a fictional model, entirely in Canadian dollars. It illustrates arithmetic, not a proposed valuation or a promise of payment. Assume one 12-month measurement period, a zero floor and a maximum earnout of C$450,000. “Eligible revenue” means the amount determined under the fictional contract’s definition.
Earnout = the smaller of C$450,000 and 30% of eligible revenue above C$4,000,000, with a minimum of zero.
Below the threshold: C$3.8 million. Subtracting C$4 million gives minus C$200,000. The zero floor turns that into zero; 30% of zero is zero. Calculated earnout: C$0.
Between threshold and cap: C$4.6 million. The excess is C$600,000. Multiplying by 30% gives C$180,000, below the cap. Calculated earnout: C$180,000.
Above the cap: C$6 million. The excess is C$2 million. Thirty per cent gives C$600,000, but the cap limits the calculated earnout to C$450,000.
This model excludes interest, tax and offsets. The numbers answer only the calculation question under those assumptions. They do not establish when money arrives.
The testing period can change the answer
Now compare two separate, invented two-year arrangements. Both use eligible revenue of C$3.8 million in year one and C$5.2 million in year two. MNP distinguishes annual and aggregate tests, including possible limits and catch-up terms; the following comparison deliberately specifies each assumption.
Annual test: Apply the C$4 million threshold, 30% rate, zero floor and C$450,000 cap separately each year. There is no shortfall carryforward or catch-up. Year one produces zero. Year two produces 30% × C$1.2 million = C$360,000. Total: C$360,000.
Cumulative test: Add both years, then apply one C$8 million threshold, a 30% rate, zero floor and C$900,000 total cap. Revenue totals C$9 million. The C$1 million excess produces C$300,000.
The C$60,000 difference comes from the first year’s shortfall reducing the cumulative excess. In the annual version, its zero floor prevents that shortfall carrying into year two. Payment dates remain separately unspecified. These inputs favour the annual version; they do not establish that annual testing is always better.
Separate your continuing role from your control
Stikeman’s 2014 discussion describes a commercial tension: the seller may want continuity while the buyer wants freedom to integrate. Staying on as a manager does not necessarily preserve your former decision-making power. Explicit operating permissions and adjustment mechanisms are possible negotiated responses, not automatic protections.
Take a proposed operating change—such as rebranding or adding customers—and ask which clause governs its treatment in the earnout. A business change that reduces the result is not, by itself, proof of wrongdoing. McCarthy’s drafting discussion treats operating covenants and calculation rules as matters to address together.
Compare any continuing employment or consulting arrangement with the earnout provisions. Osler identifies these as possible ancillary documents; Stikeman separately flags employment termination as an event parties may address. The practical question is whether the documents fit together. Do not assume leaving the job either cancels or accelerates the payment.
Agree the reporting package before you need it
US-based SRS Acquiom’s operational guidance offers a useful checklist: periodic reports, supporting records, agreed access to relevant people and consistent reporting even when performance disappoints. These are access arrangements to negotiate, not a statement of Canadian statutory rights.
For your review calendar, identify:
The report: its date, the period covered and the detail behind the final number.
The supporting material: the statements, sales records or working papers needed to check the calculation.
The contact: who can explain differences or supply missing information through the agreed route.
The follow-up: how questions and responses will be recorded.
Do not build that process around informal calls to former employees. Agreed access matters; their confidentiality obligations do not disappear because you used to own the company.
Match the dispute process to the disputed question
“The sum is wrong” and “the buyer was not permitted to do that” are different questions. McCarthy cautions against automatically assigning every earnout dispute to an accountant. Ask counsel which agreed process covers calculations, interpretation and contested conduct.
Put the notice route and actual contractual deadlines beside that process. McCarthy’s July 2025 guidance recommends raising concerns promptly; that is practical guidance, not a universal deadline. A useful issue note identifies the calculation, the disputed assumption, the document provision and the answer requested.
Use the same approach to test a later sale or another foreseeable change: describe the scenario, locate its agreed treatment and flag what remains unanswered. A sample calculation can expose a gap; it cannot supply a missing term.
Check whether the buyer can pay the result
There is a final question after “what would I earn?”: can the buyer fund it?
BDO’s April 2019 US guidance raises future ability to pay and financing approvals as separate commercial concerns. For a Canadian transaction, ask your advisers to identify the payment obligor, relevant financing approvals and any negotiated security, together with its limits. The US discussion does not establish Canadian creditor rights.
Keep two entries in your working record: calculated amount and payment received. A completed calculation does not fill in the second entry. Neither a reassuring buyer name nor the presence of a guarantee establishes that collection is certain.
Bring a small pack, not a pile of impressions
Bring the scenarios and a short list of unresolved terms to your next discussion. For each question, identify the clause, the assumption and the answer needed. The useful test is whether both sides can explain the same outcome from the same wording.