An earn-out should define the performance measure, accounting policies, operating assumptions, information rights and dispute process. Address the buyer's post-closing control and transactions that can affect the calculation. The formula needs to be reproducible from agreed records, with a clear route for resolving both accounting and legal disagreements.
The business situation
The seller's additional price depends on revenue growth. After closing, the buyer integrates the business and moves some customer contracts to another group entity. The parties disagree whether the revenue belongs in the earn-out calculation or reflects ordinary integration.
The diligence question is not merely whether a defect exists. It is whether the defect changes value, transaction structure, conditions to closing or the buyer's ability to operate the business. A share acquisition, business transfer and asset purchase allocate rights and liabilities differently.
What needs examining
01. Define the metric beyond its label
Revenue, EBITDA and customer retention can each be calculated in different ways. State the period, recognition policies, adjustments and treatment of exceptional items. Specify how group charges, related-party dealings, refunds and discontinued products affect the measure. Test the formula against worked examples before agreeing it.
02. Address control without freezing the business
The buyer needs operational flexibility; the seller needs protection against conduct that undermines the agreed bargain. Define relevant covenants, permitted integration and any prohibited diversion. Avoid vague obligations that neither side can implement confidently. Consider what happens on a sale, closure or material restructuring during the earn-out period.
03. Separate calculation disputes from legal disputes
Set the statement process, access to supporting records, objection period and scope of expert determination. An accounting expert may not have authority to decide every contract interpretation or misconduct allegation. Coordinate the expert mechanism with the main dispute clause and preserve the records needed for either route.
Law, contract and recommended practice
The Companies Act, 2013, contract law and transaction-specific tax, competition, foreign-exchange, employment and sector requirements may apply. Approval and filing obligations should be checked against the actual parties, structure and thresholds, rather than inferred from the transaction's headline value.
Connect the control to the evidence
Use this table to scope the review. The legal basis and the practical control are identified separately.
| Obligation or objective | Practical control | Evidence to retain |
|---|---|---|
| Contractual control Calculate the contingent price consistently | Defined metric and accounting policies | Worked examples and calculation schedule |
| Contractual control Address post-closing conduct | Operating covenants and information rights | Management records and disclosures |
| Procedural control Resolve the correct type of dispute | Expert and legal dispute allocation | Objection and determination record |
Records to prepare
Bring the complete, current record to the review. Preserve earlier versions where a change or disputed event makes them relevant.
Common questions
Is referring to EBITDA enough to define the payment?
Usually more detail is needed. Accounting policies, adjustments, allocations and exceptional items can materially change the result. Define and test the measure.
Should an accountant decide every earn-out dispute?
Not necessarily. Distinguish calculation issues from legal interpretation or alleged covenant breaches. The agreement should allocate jurisdiction clearly.
Run at least one ordinary, one adverse and one integration scenario through the formula. Resolve the differences while the parties can still amend the bargain.
Legislation & official resources
These references identify the governing frameworks. Confirm the current text, relevant amendments and applicable judicial position for the matter.
- Companies Act, 2013 — official legislative portalIndia Code · Government of India · Locate the current Act and applicable rules on India Code. Company category, exemptions and amendments matter.
- Indian Contract Act, 1872Government of Uttar Pradesh · Commercial Tax Department · Government-hosted statutory reference. Read with applicable amendments, special law and judicial interpretation.
- Master Direction — Foreign Investment in IndiaReserve Bank of India · Official direction, displayed as updated to 15 June 2026 when reviewed. Read with the NDI Rules and applicable sector policy.
This note is general information. The scenario is hypothetical and does not describe a client matter. The legal result depends on the facts, documents, jurisdiction and operative law. No individual lawyer review is represented by the preparation date.
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