The buyer is proposing a two-year earnout where the final payout is calculated by their own internal CFO. How do we structure the dispute resolution mechanism and the accounting standards in the purchase agreement so we do not get dragged into a costly legal fight over their post-close bookkeeping?

Question

Tyler Smith · Accepted Answer

Relying on a buyer's internal CFO to calculate your earnout is a recipe for a post-closing disaster. To protect your proceeds, the purchase agreement must define the accounting standards with extreme precision. You must reject any generic reference to GAAP and instead mandate that the earnout calculations follow the exact historical accounting practices used by your business prior to the sale. This prevents the buyer from changing inventory valuation methods, accelerating depreciation, or shifting corporate overhead expenses onto your post-close income statement.

Furthermore, you must establish a clear dispute resolution mechanism. The agreement should require the buyer to deliver a detailed earnout statement within thirty days of the period's end, complete with supporting workpapers. You should have a thirty-day review period to audit these numbers. If you disagree, the contract must dictate that both parties submit the dispute to an independent, pre-selected national CPA firm. This firm will act as an arbitrator, not a mediator. Their decision must be final, binding, and delivered within thirty days, with the losing party paying the fees. This prevents the buyer from using administrative delays to force you into accepting a lower payout.

Keep your leadership team focused on their Rocks during this transition. Use your weekly Level 10 Meeting™ to monitor the post-close operational metrics that drive the earnout. By documenting these metrics in your weekly scorecard, you create a real-time paper trail that supports your position if the buyer tries to alter the calculations.