We are agreeing to an earnout, but we are terrified the buyer's internal accounting team will use creative write-offs or depreciation post-close to suppress our earnout EBITDA. How do we structure the dispute resolution and audit provisions specifically for the earnout calculations to ensure an independent referee decides?

Question

Tyler Smith · Accepted Answer

To protect your earnout from creative post-close accounting, you must write tight, ironclad audit and dispute resolution provisions directly into the purchase agreement. Do not rely on standard, generic legal templates. First, specify that the earnout calculations must be prepared in strict accordance with historical accounting practices and GAAP, applied consistently with how you ran the business pre-close. Explicitly exclude any parent company overhead allocations, transaction expenses, amortization of intangible assets, or post-acquisition depreciation from the earnout EBITDA calculation. Second, negotiate a clear review period. You must have at least thirty to forty-five days after receiving the buyer's earnout statement to review their books, records, and working papers. If you find discrepancies, you should have the right to deliver a written dispute notice. If you and the buyer cannot resolve the dispute within thirty days, the agreement must mandate that the issue be submitted to an independent, national accounting firm that acts as an expert referee, not an arbitrator. The fees of this independent accountant should be allocated based on who is closer to the final determination, which discourages the buyer from lowballing your payout. This structure keeps the audit process objective and fast.