Two payment cards for the same measurement year sit apart, with Schedule 6 left unjoined, in the opening of the earn-out audit.

How to Audit an Earn-Out Formula, Conduct Covenant, and Acceleration Trigger

Mark two earn-out limbs as one payment or two, lock the accounting basis and a worked example, and name the acceleration sum before you sign.

October 20, 2026•9 min read•Article

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Key takeaway in 30 seconds

An earn-out on an England and Wales share purchase is deferred consideration calculated by a formula. Two money triggers in the same year stay two payments until the schedule says they are one. Lock specific policies, then named accounts, then a frozen FRS 102 edition, and staple a worked example. Write the conduct list and the recalculation, number the days to object, and name the acceleration sum. Do not sign while a mark is still open wording.

Two money triggers in the same measurement period are two payments until the schedule says they are one. On the 9 October 2026 draft, clause 6.1 pays five times Earn-out EBITDA above £2,000,000, capped at £1,500,000. The year is 1 December 2026 to 30 November 2027. Clause 6.2 pays £400,000 if revenue is above £8,000,000. Schedule 6 never makes the limbs one payment.

Disclaimer: Checkory provides AI support, not legal advice. Consult a qualified lawyer for binding decisions.

Why do two triggers in one year stay two payments?

Clause 6.1 and clause 6.2 share 1 December 2026 to 30 November 2027, and the draft never joins them. ICAEW Guideline 70 lets two metrics run together or on a sliding scale. Five times the excess and the £400,000 stay separate while the schedule is silent. The 16 October 2026 message does not amend Schedule 6.

Earn-out EBITDA at five times the excess, capped at £1,500,000, sits beside a £400,000 revenue limb for the year ending 30 November 2027, in the section on why two triggers stay two payments.

Why lock specific policies, then accounts, then a frozen edition?

Guideline 70 and BDO on 8 December 2023 set the same order. Specific policies come first, then a named set of accounts, then GAAP or IFRS frozen at an edition. Clause 6.3 starts with the buyer's policies from time to time, otherwise IFRS. BDO notes the buyer's incentive to use a policy that lowers the earn-out.

The FRC June 2026 explainer applies most FRS 102 changes to periods beginning on or after 1 January 2026. Section 20 leases and Section 23 revenue are in that set. The March 2024 note gives those dates. EBITDA may change, and this year starts 1 December 2026, so freeze the edition.

Staple £2,300,000 minus £2,000,000, times five, which is £1,500,000, and show the £400,000 as a second cheque or folded in. That worked example is not the books of Derwent Mug Ltd.

Why does a good-faith sentence fail as the conduct list?

Clause 6.4 says the buyer shall operate the business in good faith, and it stops there. Guideline 70 wants a discrete entity, no merger, and arm's-length deals.

In Porton [2011] EWHC 2895 (Comm), clause 4.15 disclaimed a duty to maximise except for clause 4.14. Good faith did not add that duty. Wagner Hicks reports past practice in 14% of earn-out deals and a maximise covenant in 5%. The ABA, December 2025, shows earn-outs from 26% to 18%. Those US figures do not supply the list missing from clause 6.4.

Johnson & Johnson v. Fortis Advisors LLC on 12 January 2026 reversed an implied term the contract never wrote. Do not ask an English court to invent ordinary course, or a £1,900,000 acceleration, from silence. Recalculate Earn-out EBITDA as if the breach had not happened.

Conduct items for separate books, arm's-length charges, and a named slice that needs consent, in the section on why a good-faith sentence fails as the list.

Why number delivery, objection, and access to the books?

Clause 6.5 uses a reasonable time, a bare objection, and an accountant on the whole Earn-out Payment. There is no day count and no right to the books. Eversheds Sutherland, on 2 July 2021, sends calculation disputes to the expert. A conduct claim goes to court or arbitration unless recalculation is already the remedy. The seller often bears the burden on a disputed line.

Davis Wright Tremaine allows about 30 days to negotiate. The accountant decides only disputed items.

Why name acceleration as a sum, a deemed result, or zero?

Clause 6.6 says a sale of a material portion is dealt with as the parties shall agree. It names no sum. The choices are a stated sum, a deemed result, or zero. Say if that sum is £1,500,000, £400,000, both, or less.

In 2025 ONCA 855, on 8 December 2025, a sale-leaseback and factoring left up to US$26,461,000 unaccelerated. Norton Rose Fulbright, in February 2026, says to name a sale-leaseback or factoring if either should trigger payment, and to say if size alone governs. Keep US$26,461,000 off this England and Wales schedule.

The 18 September 2026 heads are subject to contract. Write that they do not set the sum and do not pay £1,900,000. SRS Acquiom shows acceleration in 39% of its 2024 US earn-out deals, subject to exceptions such as assumption by the next buyer.

Acceleration outcomes of a stated sum, a deemed result, or zero, covering the cap, the revenue limb, both, or less, in the section on naming the acceleration amount.

Why hold the signature when a mark is still open wording?

Read the six marks back before you sign on Friday 23 October 2026. Do not sign if a mark is still worded as the parties shall agree, a reasonable time, or from time to time.

Finality versus an arbitration award is on the expert determination page. A holdback of completion cash is on the milestone holdback page. A drag-along or tag-along on the seller shares is on the drag-along page. A yearly percentage on a fee is on the annual price uplift page.

When the draft is a PDF or a DOCX, run a first pass (one read that marks open wording before anyone signs) in document analysis. You get a structured risk overview of this file.

Six marks on Schedule 6

Write one payment or two

On draft SPA v4 dated 9 October 2026, Derwent Mug Ltd to Fellside Holdings Ltd, English law, write whether both limbs pay, only the higher pays, or revenue folds into EBITDA. Use in addition or instead.

Lock policies, accounts, and the edition

Put specific policies first, then the accounts to 30 September 2026, then FRS 102 at a named edition, and freeze that edition. Tie the opening balance sheet to completion accounts if they exist, then stop.

Staple a worked example

Run £2,300,000 minus £2,000,000, times five, to £1,500,000, and show whether £400,000 is a second cheque. If the example will not run, the definitions are unfinished.

Write the conduct list and the recalculation

List separate books, no merger, arm's-length charges, no diversion, and no sale of a named slice without consent. If that list is breached, recalculate Earn-out EBITDA as if the breach had not happened.

Number delivery, objection, and the books

Set delivery at 60 to 90 days and objection at 30 to 60 days, listing each disputed line, with access to the books. The accountant decides only those lines.

Name the acceleration amount

Pick a stated sum, a deemed Earn-out EBITDA, or zero, and say if a sale-leaseback and factoring count. The 18 September 2026 heads do not set the sum. Avoid signing while it is still worded as the parties shall agree.

Objection timetable and who decides

Point	What you write	Who decides
Delivery	A numbered day, often 60 to 90 days after the period. A reasonable time stays open.	Buyer prepares the statement.
Objection	A numbered window, often 30 to 60 days. The notice lists each line.	Seller, on those lines.
Books	Access during that window. Reasonable requests, with no right to look, still leave a dispute.	Seller may see the books.
Accountant	Mandate limited to the lines in the objection.	Accountant, on disputed lines only.
Conduct	A contract claim, unless recalculation is already the remedy.	Court or arbitration.

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Good faith is not the list

The typical mistake is to treat "operate in good faith" as the conduct covenant. That sentence does not name separate books, an arm's-length charge, or a forbidden sale, and it does not set the recalculation. Write the acts and the effect on Earn-out EBITDA.

Frequently asked questions

Can the buyer change accounting policies after completion?▼

Yes, if it says policies from time to time. Put specific policies first, then named accounts, then FRS 102 frozen at an edition. Do not sign a hierarchy that starts with future policies.

What is paid if the buyer sells during the period?▼

Only what clause 6.6 names: a stated sum, a deemed result, or zero. The 18 September 2026 heads do not supply the figure.

Who decides a disputed accounting line?▼

The accountant, and only the lines in the objection. A conduct claim goes to court or arbitration unless recalculation is already the remedy. Limit the mandate before you sign.

Are two triggers in the same year one payment?▼

They stay two payments until the schedule says they are one. Write both, only the higher, or revenue folded into EBITDA.

Is good faith the conduct covenant?▼

No. Name the books, the arm's-length charges, the forbidden acts, and the recalculation if they are breached. Write that list before signing.

Do the heads of terms set the acceleration sum?▼

No. Those 18 September 2026 heads are subject to contract. Write in Schedule 6 that they do not set the sum and do not pay £1,900,000.

Does a sale-leaseback or factoring count if the clause never names it?▼

Say whether it counts. In 2025 ONCA 855 those deals left up to US$26,461,000 unaccelerated. That Ontario case does not set this schedule. Write that choice in the clause before you sign.