The Earnout Reckoning: Why 2023-Era Deal Structures Are Now in Court

When buyers and sellers could not agree on a purchase price during the 2022 and 2023 deal cycles, earnouts filled the gap. The buyer offered less cash up front, the seller accepted a contingent payment tied to future performance, and both sides moved on. Three years later, those earnouts are hitting their calculation endpoints, and the Delaware Court of Chancery is seeing a measurable uptick in disputes. The story playing out in court is a useful warning for every owner currently being offered a deal with contingent consideration.

What the data actually shows

According to SRS Acquiom data, earnouts appeared in roughly 22 percent of US private M&A transactions in 2024 (excluding life sciences, where earnouts are near-universal). The structure is popular because it bridges the valuation gap between what a buyer will pay with certainty and what a seller believes the business is worth. On paper, it looks like a win for both sides: the buyer limits downside, the seller preserves upside.

The track record is harder to romanticize. Studies of private company exits have consistently found that more than 60 percent of earnouts ultimately pay out less than half of the potential total, and roughly one in three pays nothing. Some of that is honest business performance falling short of optimistic projections. A meaningful share is something else, which is where the litigation comes in.

Why the disputes arise

Earnout disputes cluster around two recurring issues. The first is whether the milestones were actually met, which sounds mechanical but is often anything but. Revenue definitions, EBITDA adjustments, customer concentration carve-outs, and accounting method changes all create room for legitimate disagreement about whether a target was hit. A seller expecting a clean revenue hurdle can find themselves in a dispute about whether certain contracts qualify, whether discounts and rebates were counted correctly, or whether integration costs should reduce the earnout base.

The second and more contentious issue is buyer conduct during the earnout period. Most purchase agreements contain some version of a covenant requiring the buyer to operate the business in good faith or use commercially reasonable efforts to achieve the earnout targets. Sellers regularly argue that the buyer made decisions (reallocating sales resources, repricing products, discontinuing marketing, changing commission structures) that depressed performance enough to miss the target. Buyers respond that they were exercising normal business judgment in a changed environment. The Delaware courts have been busy refereeing exactly these disputes, and the recent pattern of decisions suggests judges are increasingly willing to look closely at buyer behavior rather than deferring automatically.

The 2022-2023 cohort is structurally exposed

There are two reasons the current wave of litigation is concentrated around deals from the 2022 and 2023 cycles. First, those deals were negotiated in a period of rapid macroeconomic change: rate hikes, inflation, changing consumer demand, and sector-specific disruption. Target metrics set in Q1 2023 often stopped being achievable by Q3 2023, not because of anything the buyer did, but because the underlying economy moved. When sellers miss by a wide margin, they look harder at what the buyer did during the period and find reasons to contest the calculation.

Second, those deals were often negotiated under time pressure. When valuation gaps were wide and sellers wanted to close, earnout structures were sometimes accepted with milestone definitions that were vague, with buyer operating covenants that were thin, and with dispute resolution mechanisms that were not specific enough to prevent full-blown litigation. That drafting debt is now coming due.

What sellers should take from the current wave

If you are being offered an earnout today, three things matter more than the headline number. The first is how the metrics are defined. A carefully drafted earnout spells out exactly how revenue or EBITDA is calculated, which adjustments are permitted, how new products or acquisitions are treated, and how accounting methodology changes are handled. Vague definitions produce disputes. Precise definitions produce payments.

The second is the operating covenant. Sellers should push for specific language requiring the buyer to operate the acquired business consistent with past practice, maintain sales and marketing investment at historical levels, and refrain from specific actions (discontinuing product lines, reallocating customers, integrating in ways that suppress performance) that would predictably hurt earnout achievement. Generic "commercially reasonable efforts" language is weaker than it looks when a dispute arrives.

The third is the payout mechanics. Short earnout periods (two to three years at most) with interim measurement points, clear definitions of what triggers acceleration, and a fast, low-cost dispute resolution path are the features that correlate with earnouts actually paying out. Long earnout periods with single measurement points and informal dispute processes are the features that correlate with litigation.

Practical advice if you are mid-earnout

If you sold a business in 2022 or 2023 and you are currently inside an earnout period, two actions are worth considering. First, request regular reporting on the earnout calculation from the buyer as the period progresses, even if the agreement does not strictly require it. Waiting until the final calculation to discover problems reduces your leverage dramatically. Second, document everything you see about how the business is being operated post-closing. If the buyer is making decisions that depress performance, contemporaneous notes and emails will matter far more than reconstructed memories two years later.

The goal is not to create a dispute where none exists. The goal is to put yourself in a position to evaluate the final calculation with real information rather than having to trust the buyer's math under pressure.

What to watch next

Two things will shape the next phase of earnout disputes. The first is how Delaware courts rule on the pending cases involving 2022-2023 deals. A few clear decisions on buyer operating covenants would give dealmakers much better guidance on where the line sits. The second is whether buyers and sellers adjust their templates in response. If earnout litigation continues to rise, we should expect earnout provisions in 2026 and 2027 agreements to get longer, more specific, and more heavily negotiated.