If there’s one clause in an English law M&A share purchase agreement that sparks debates, spreadsheets and sometimes sleepless nights, it’s the earn-out. In 2026, earn-outs aren’t just negotiation leftovers. They’re a core tool to bridge valuation gaps, align buyer and seller incentives and protect against post-completion surprises.
But here’s the thing: badly drafted earn-outs often lead to disputes, delayed payments and strained relationships between buyers and sellers. Good drafting isn’t about legal trickery. It’s about clarity, fairness and practical alignment.
Some practical tips:
Start with the suitable financial metrics
Revenue? EBITDA? Cash flow?
The metric matters and it should reflect how the business creates real value. In 2026, the trend is moving away from top-line revenue metrics alone toward:
- Contribution margins, recurring revenue or operating cash flow
- Customer retention / winning new customers
- Other measurable performance indicators that cannot be easily manipulated post-completion
The clearer and more carefully thought out the financial metric, the fewer headaches later.
Control the business, without killing the earn-out
Post-completion control is a classic tension point between buyers and sellers. Buyers want flexibility to run the business while sellers want protection to achieve earn-out targets.
Drafting tips for sellers:
- Include conduct covenants specifying how the business must be run to preserve the earn-out
- Restrict buyers’ discretion over key value drivers
Drafting tips for buyers:
- Resist “operate in the ordinary course consistent with past practice” as it locks the buyer into a legacy operating model
- Avoid minimum spend or investment covenants
Clarity here avoids disputes over “Did the buyer sabotage my earn-out?” claims.
Timing, reporting, and dispute resolution
Nothing drives disputes like ambiguity in timing or calculation:
- Set out clear deadlines for reporting earn-out results
- Agree accounting policies in advance, especially if accruals or seasonality are relevant
- Provide practical dispute resolution mechanisms e.g. independent accountants or expert determination, to avoid lengthy litigation
Remember: your goal is speed and certainty, not perpetual negotiation or litigation after completion.
Factor in market realities
Earn-outs aren’t just theoretical, they interact with:
- Market volatility, inflation or seasonality
- Post-acquisition business integration
Draft with foresight and don’t let an earn-out collapse because nobody anticipated a cost spike or contract delay.
Key takeaways
In 2026, a good English law firm will work with their client to ensure that the earn-out contains:
- Suitable financial metrics
- Practical conduct covenants
- Transparent reporting and robust dispute mechanisms
- Consideration of market realities
When drafted and negotiated well, earn-outs protect buyers from overpaying, reward sellers for real performance and reduce post-completion friction.
In short: earn-outs aren’t just a side clause. They are a tool to make your transaction work in the real world.
