In our draft earnout agreement, the buyer retains sole discretion over how earnout calculations are audited and gives us only fifteen days to object to their year-end statement. What specific audit rights and accounting dispute mechanics must we require to ensure a fair calculation?

Question

Tyler Smith · Accepted Answer

Allowing a buyer sole discretion over earnout accounting while limiting your objection window to fifteen days guarantees you will lose your deferred compensation. Buyers have every incentive to allocate shared corporate costs, inflate operational reserves, and delay revenue recognition to depress earnout milestones.

To protect your earnout proceeds, establish strict procedural safeguards in the purchase agreement:

- Expand the review window: Require at least forty-five to sixty days following receipt of the buyer annual earnout statement to review books, records, and underlying accounting schedules.
- Guarantee full audit access: The contract must grant you and your independent CPA unfettered access to all general ledgers, journal entries, contracts, and working papers relevant to the calculation.
- Freeze accounting principles: Mandate that earnout figures be calculated using the identical accounting principles, policies, and practices used in your pre-closing financial statements, strictly adhering to consistent GAAP applications rather than the buyer internal corporate methodology.
- Independent accounting referee: Include an expedited dispute resolution mechanism. If the parties cannot resolve a disputed calculation within thirty days, mandate that an independent, nationally recognized accounting firm resolve the disagreement, with the non-prevailing party paying all arbitration and professional fees.

Without these operational and legal guardrails, your earnout is not deferred purchase price. It is an uncollectible wish.