Earnout and Purchase Price Adjustment Checklist: A Practical Checklist

Document type: Checklist Practice area: Corporate — Mergers and Acquisitions Jurisdiction: United States (Delaware and federal) Last reviewed: 5 September 2026

How to use this checklist

Sections 1 through 7 are drafting. Sections 8 and 9 are administration and run from closing through final payment. Section 10 is the dispute path.

Items marked [HIGH VALUE] are the ones that most often decide the outcome, and the ones most often left out of a first draft.

1. Threshold: should there be an earnout?

The contingency identified: what specifically is uncertain?
The contingency is binary and verifiable, or it is not — recorded either way.
The contingency is within or outside the buyer's control — recorded.
Whether the target will be operated standalone or integrated immediately.
Whether seller management will remain through the earnout period.
Alternatives considered and rejected on the record: lower fixed price; seller note; rollover equity; holdback; representation and warranty insurance.
Seller advised, in writing, that an earnout is a contingent claim against a company it will not control, measured by numbers it will not prepare. [HIGH VALUE]
Probability-weighted present value of the earnout modeled and shown to the client. [HIGH VALUE]

2. Letter of intent

Metric named (binary event / revenue / gross profit / EBITDA / net income).
Measurement period stated.
Payout structure stated as linear or tiered between a floor and a cap — not a cliff. [HIGH VALUE]
Cumulative measurement (shortfalls recoverable from later outperformance) stated.
Acceleration on sale, discontinuation, and covenant breach stated in principle. [HIGH VALUE]
Operating covenants flagged by category.
Security flagged — at minimum a parent guarantee.
Buyer's reservation of operating discretion (subject to agreed covenants) stated.

3. Defining the earnout metric

"Business" defined by product SKU and contract, not by legal entity or business unit. [HIGH VALUE]
Successor, derivative, and replacement products expressly included.
Revenue attribution follows the product sold, not the entity or sales organization that books it. [HIGH VALUE]
Bundle allocation methodology stated (standalone list price basis or other).
Intercompany transfer price for Business products stated.
If EBITDA or below: overhead allocation capped in dollars, with an escalator. [HIGH VALUE]
Overhead exclusion list: corporate development, investor relations, treasury, internal audit, buyer-wide systems implementations, buyer's other acquisitions, buyer management fees.
Metric exclusions: purchase accounting effects; transaction expenses; non-cash stock compensation; transaction-created goodwill impairment; buyer-driven restructuring charges.
Treatment of revenue recognition policy changes — prohibited or neutralized.
Treatment of acquisitions and dispositions by the Business during the period.
Currency and conversion mechanism if cross-border.

4. Sample calculation and accounting hierarchy

Sample calculation prepared using the target's most recent full fiscal year and actual trial balance. [HIGH VALUE]
Every definition and exclusion applied in the sample calculation.
Both sides' accountants have agreed the arithmetic.
Sample calculation attached as a signed exhibit.
Accounting hierarchy stated in three tiers: (1) agreed policies exhibit; (2) historical practice consistently applied; (3) GAAP. [HIGH VALUE]
Anti-restatement covenant included: no change in reserves, accruals, estimates, or judgments except where underlying facts changed; no methodology not used in the sample calculation.
Confirmation that both sides' systems can actually produce the metric.

5. Operating covenants and buyer discretion

Separate books and records for the Business, prepared consistently with the sample calculation.
Minimum dedicated sales headcount stated numerically.
Minimum marketing spend stated as a percentage of revenue or a dollar floor.
No discontinuation or cessation of support for scheduled products without consent.
Pricing change limits with a consultation requirement.
No reassignment of scheduled customer accounts away from the Business organization.
Treatment no less favorable than comparable buyer products in channels, incentive plans, and marketing.
No change to revenue recognition policy for the metric.
Retention of named key employees other than for Cause.
Effects-based backstop covenant that does not turn on intent. [HIGH VALUE]
Buyer discretion clause, expressly subject to the covenants.
Efforts language deleted or, if retained, supplemented with numeric floors.

6. Acceleration, security, and set-off

Acceleration events enumerated: sale of the Business; discontinuation above a stated threshold; uncured covenant breach; change of control without written assumption; key employee termination without Cause; insolvency. [HIGH VALUE]
Acceleration payment amount stated (maximum remaining earnout, or a formula).
Obligor identified by name and its creditworthiness assessed.
Parent guarantee obtained. [HIGH VALUE]
Escrow or letter of credit considered and priced.
Negative covenants at the obligor level considered (distributions, additional indebtedness).
Set-off limited to finally determined claims, or disputed amounts escrowed rather than retained. [HIGH VALUE]
Order of recourse specified among adjustment escrow, indemnity escrow, insurance, earnout, and seller recourse.

7. Purchase price adjustment mechanics

Components

Line-item schedule prepared from the trial balance; every account designated as working capital, cash, indebtedness, transaction expense, or excluded. [HIGH VALUE]
Deferred revenue treatment resolved: in or out; at face or at cost to fulfil.
Income tax accounts resolved.
Accrued bonuses and vacation treatment resolved.
Intercompany balances eliminated expressly.
Current portion of long-term debt placed in indebtedness and not double-counted. [HIGH VALUE]
Prepaid expenses, including insurance to be cancelled at closing.
Inventory reserve methodology stated.
Cash defined: gross or net of outstanding checks; restricted cash; foreign cash and repatriation cost.
Indebtedness defined by list, including capital leases, deferred purchase price from prior acquisitions, accrued interest, prepayment penalties and breakage, underfunded pension, related-party loans, and drawn letters of credit.
Transaction expenses defined by list, including employer payroll taxes on transaction bonuses and change-of-control payments. [HIGH VALUE]

Target and mechanics

Working capital target computed from the same schedule and methodology as the closing statement. [HIGH VALUE]
Seasonality adjustment considered.
Two-way or one-way adjustment stated.
Collar stated as a true deductible or a true threshold, and identified as which.
Adjustment escrow funded, separate from the indemnity escrow.
Escrow release automatic on finalization.
Same accounting hierarchy and anti-restatement covenant applied.

8. Dispute mechanism design

Preparation period stated; preparing party identified.
Access provision enumerating: books and records; work papers; buyer consolidation entries; cost allocation schedules and supporting detail; intercompany pricing records; management reporting packages; SKU-level revenue detail; headcount and marketing spend data. [HIGH VALUE]
Objection period stated, and starting on delivery of access, not on delivery of the statement. [HIGH VALUE]
Deemed acceptance consequence stated.
Objection specificity requirement stated; consequence for unobjected items stated.
Negotiation period before submission.
Independent accountant named, with a nomination fallback and a default appointment mechanism.
Conflicts screening required before appointment.
Scope limited to disputed items only.
Baseball resolution required (accountant must select one party's position per item). [HIGH VALUE]
Governing standard stated as the agreement's hierarchy and the sample calculation, not the accountant's preference.
Procedure stated: simultaneous written submissions, page limits, one response round, no ex parte contact, determination deadline.
Fees allocated in proportion to amounts decided against each party.
Expert or arbitrator status stated expressly — determining whether 9 U.S.C. § 9 confirmation and § 10 vacatur review apply. [HIGH VALUE]
Breach claims expressly carved out of the accountant's jurisdiction and routed to litigation or arbitration. [HIGH VALUE]
Accountant instruction letter drafted as an exhibit at signing.

9. Seller representative and allocation

Representative appointed by name in the agreement and in the letters of transmittal.
Irrevocable power of attorney binding successors and assigns.
Authority granted: receive notices, object, negotiate, settle, engage professionals, bind sellers, allocate and distribute.
Expense fund withheld at closing, replenishable, returnable at termination. [HIGH VALUE]
Exculpation and indemnity from sellers.
Professional representative firm considered where sellers are numerous.
Allocation spreadsheet prepared and attached at closing, covering preferences, participation, option holders, and non-signing holders. [HIGH VALUE]

10. Administration

Buyer, from day one

Reporting unit created and general ledger configured to produce the metric per the sample calculation. [HIGH VALUE]
One-page operating covenant summary circulated to integration, sales, finance, and product leadership. [HIGH VALUE]
Quarterly covenant compliance record maintained: headcount, marketing spend, product continuity, account assignments, pricing.
Business decisions affecting the metric documented with contemporaneous independent rationale.
Internal communications discipline briefed.
Statement delivered on time, tied line by line to the sample calculation, with supporting schedules.
Voluntary interim information provided to the seller representative.

Seller representative, when a statement arrives

Objection deadline and all intermediate dates calendared the same day. [HIGH VALUE]
Written access request sent the same day, listing categories specifically. [HIGH VALUE]
Accountant with earnout dispute experience engaged.
Statement tied line by line to the sample calculation.
Overhead allocation tested against the cap and the exclusion list.
Revenue attribution tested at SKU level.
Exclusions tested.
Covenant compliance tested separately from the accounting.
Objection notice objects to every item with any basis — withdrawal is possible later, addition is not. [HIGH VALUE]

11. Tax

Installment method under 26 U.S.C. § 453 applied, or election out made deliberately.
Contingent payment basis recovery method determined.
Imputed interest computed under 26 U.S.C. § 483 and, for debt instruments, 26 U.S.C. § 1274.
Whether the earnout bears stated interest, and at what rate, addressed in the agreement.
Purchase price separated from employment compensation — earnout not conditioned on continued employment; separate market-rate employment agreement. [HIGH VALUE]
Consideration allocation among asset classes addressed and updated as payments are made.
Buyer and seller reporting positions agreed at signing to avoid inconsistency.
Withholding and gross-up addressed if cross-border.

12. Dispute path

Claim characterized correctly: express covenant breach; accounting dispute; implied covenant.
Implied covenant claim assessed against its limits — it fills gaps and does not override express terms.
Contractual deadlines confirmed met.
Discovery targets identified: integration plans, budgets and variances, sales compensation plans, channel policies, management reporting packages, board materials, accounting work papers.
Counterfactual damages model built with an expert.
Acceleration claim asserted where available, in preference to a damages claim.
Employment consequences for seller principals still employed considered and addressed.
Settlement posture assessed against the cost of a multi-year dispute over a contingent sum.