You closed the deal. The buyer owns the business. You've mentally and financially moved on. Then, six months in, something lands. The buyer claims the earnout wasn't triggered. Or they file a reps-and-warranties claim on something you thought you'd disclosed. Or they say they can't pay the working capital adjustment because their accountants count inventory differently.
Roughly 40% of sellers experience some version of this. Almost every time, it traces back to gaps in the purchase agreement. Revenue wasn't defined precisely. The inventory method wasn't specified. Those gaps are where disputes live, and once the buyer owns the business, the buyer controls the narrative. The prevention work happens before you sign — not after.
How Earnouts Get Manipulated
Most sellers don't want to believe a buyer would deliberately manipulate an earnout. Some wouldn't. Many do, and the playbook is consistent.
Revenue manipulation — cutting marketing, hiring, or R&D just enough to bring revenue under the threshold. Accounting method changes — counting returns or deferred revenue differently so the number comes in $200K lower than it would have. Key employee departures — quietly letting go of your top salesperson; revenue drops; threshold missed. Customer service shifts — moving to a lower-touch model that spikes churn.
None of these get written down as "manipulating the earnout." They get written down as operational decisions. Unless your agreement anticipated them, you're stuck trying to prove intent in a dispute the buyer is happy to drag out.
Tom's deal shows the pattern. He sold his SaaS company for $3M upfront, plus a $1M earnout if ARR hit $2M in year two. The agreement said the earnout was based on "our company ARR." Nothing more specific. Six months post-close, the buyer's new VP of Sales rolled out extended trial periods. Trial revenue technically counted as ARR under the letter of the deal, but it was unstable. The buyer reported $1.85M ARR, missed the target by $150K, and declined to pay. Tom is now in a dispute, and his lawyer has already spent $50K trying to prove what ARR was supposed to mean. Had the agreement defined it precisely, the dispute wouldn't exist.
Reps, Warranties, and Working Capital
Earnouts aren't the only flashpoint. When you sign the purchase agreement, you represent and warrant that certain things are true about the business: no pending lawsuits, employees properly classified, no undisclosed liabilities. If, months or even years after closing, the buyer discovers something that wasn't quite true — a lawsuit you'd forgotten about, contractors who should have been W-2, an environmental issue on the property — they can file a claim against the indemnity escrow. That's real money coming back out of your proceeds. Most sellers stop thinking about reps and warranties the day after closing. A reps claim can still land a year or two later.
Working capital disputes are the other common flare-up, and they come down to definitions. The seller's view: we had $500K in inventory at close, the APA agreed to "normal levels," and accounts payable should be part of the calculation. The buyer's view: we count inventory differently, our accountants see it as lower, and by our math you owe us $200K back. Neither side is lying — they're reading an ambiguous agreement. Phrases like "normal levels" or "consistent with past practice" without a specified method are where both sides interpret toward themselves.
Four Protections That Actually Work
Four provisions can prevent the majority of post-closing disputes — but only if they're written into the purchase agreement before anyone signs.
Define everything. Revenue, expenses, adjustments, every metric that flows into a payment gets nailed down precisely. Revenue means subscription plus product sales, excluding refunds and discounts. Working capital means these accounts, calculated using this method, at this point in time. No room for interpretation is the standard. Audit rights. Insist on the right to bring in a third-party auditor to verify the buyer's calculations during any earnout period — quarterly, not at the end. Covenant not to impair. Language preventing the buyer from taking actions intended to reduce the earnout. This is probably the single most important clause in any earnout-based deal. Escrow. Typically 10 to 20% of the purchase price held for 12 to 24 months against indemnification claims, with clear procedures for release.
The covenant not to impair deserves special attention. The clause says the buyer won't deliberately fire your top salesperson or kill key accounts to miss the number. But there's a catch: you have to prove intent. If the buyer claims they fired the salesperson for performance reasons, you'll be in a lawsuit trying to prove they're lying — expensive and uncertain. The way to make the covenant actually enforceable is to get specific. Name the key employees who must be retained for at least 12 months. Specify that major customer accounts can't be terminated without cause. Set minimum marketing spend thresholds. Specificity is what turns the covenant from a wish into a contract.
Some employee and customer turnover post-close is normal — that's just the nature of an ownership change. Sudden, concentrated losses are different. Retention bonuses for the people who drive revenue, non-solicitation language, and operational covenants that define what the buyer can't change in the first 12 to 24 months are how you defend against losses you can't otherwise control.
Prevention Versus Litigation
A 50-page APA that's crystal clear on every term will prevent roughly 90% of post-close disputes. The remaining 10% usually go to arbitration, which is faster, cheaper, and more predictable than court. If you skip the tight APA and end up in real litigation, you're looking at $200K or more in legal fees, a process that drags on 18 to 24 months, and arguments over what "revenue" meant in a meeting that happened two years ago. You'll probably still lose, or settle for less than the dispute is worth.
That makes the math obvious. An M&A attorney during negotiation — often $50K or so on a mid-size deal — routinely prevents claims that would have cost $500K to litigate. Bring them in during APA negotiation, any time an earnout is on the table, and at closing itself to review every final document. If a dispute does arise post-close, engage a specialist within about 30 days, before positions harden. Prevention is always, always cheaper than litigation.
The biggest mistake is treating the purchase agreement as paperwork you push through at the end rather than the most important document you will ever sign. Every hour spent tightening definitions and closing gaps is an hour you won't spend fighting about them later.
Torch helps sellers think through the deal document with the same rigor as the business itself — so the protections that actually matter make it into the agreement before closing, not after the first dispute letter arrives.