The Buyer Is Not Paying Your Earnout: What California Sellers and Buyers Should Know

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Often, yes. A California seller can sue for an unpaid earnout when the buyer breached the purchase agreement's operating covenants or miscalculated the metric. Where the agreement leaves the buyer discretion over the business, the implied covenant of good faith requires that discretion to be exercised in good faith, although it cannot override what the contract expressly permits. A claim on a written contract generally must be filed within four years. Kolmogorov Law, P.C. represents sellers and buyers in earnout disputes in Orange County, Los Angeles, and statewide.

Call (909) 235-6116 or contact us online to discuss an earnout that was not paid, or a claim that you owe one.

How these disputes start

The first sign is usually a one-page earnout statement. It arrives a few months after the measurement period ends and shows a number just under the threshold, or far under it.

By then the seller has watched the business change. The founder of a specialty food distributor sells to a larger competitor, with part of the price tied to two years of earnings. Within months the buyer moves the largest accounts to its own sales team, allocates corporate overhead to the acquired unit, and delays a product launch. Earnings fall short. Each decision has a business explanation. Together they erased the earnout.

Whether that is a breach depends on the words of the earnout clause, the limits California law places on discretion, and the numbers.

Read the earnout clause first

An earnout is a contract term, and a court's job is to give effect to the parties' mutual intention as it existed when they signed. (Civ. Code, § 1636.) Four parts of the clause carry most of the weight.

The metric. Revenue, gross profit, and earnings measures behave differently, and earnings measures invite the most argument because costs can be moved.

The accounting rules. "Consistent with past practice" protects a seller. "As determined by buyer in accordance with its policies" does the opposite.

The operating covenants. Some agreements require the buyer to run the business in the ordinary course, keep separate books, or use commercially reasonable efforts to achieve the targets. Others say the buyer may operate the business in its sole discretion and owes no duty to maximize the payment.

Acceleration. A well-negotiated clause makes the full earnout due if the buyer sells the unit, dismisses the founder without cause, or breaches a covenant.

Our page on purchase agreement disputes covers the rest of the deal documents.

The implied covenant and its limits

Every contract carries a covenant of good faith and fair dealing. The California Supreme Court has said it has particular application where one party holds a discretionary power affecting the rights of the other. That power must be exercised in good faith, and the seller need not show a breach of a specific contract provision. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372-373.)

For a seller, that is the path when the agreement is silent on how the business must be run. A buyer that diverts sales to an affiliate, pushes orders past the measurement date, or loads unrelated costs onto the unit may be using discretion to take back part of the price.

The limit is equally clear. The covenant will not be read to prohibit a party from doing what the agreement expressly permits. (Id. at p. 374.) If the contract says the buyer may integrate, reprice, or discontinue the product line in its sole discretion, a claim built only on those acts is difficult. Our page on the implied covenant explains the doctrine in full.

Most cases fall between those poles.

Deadlines and the accountant clause

Earnout provisions have their own short clocks. The seller typically has a fixed number of days after receiving the earnout statement to deliver a written objection, and silence makes the statement final. Calendar that date the day the statement arrives.

Calculation disagreements usually go to an independent accountant. California's arbitration statute defines an agreement to include agreements providing for valuations, appraisals, and similar proceedings. (Code Civ. Proc., § 1280, subd. (a).) Depending on how the clause is written, an accountant's determination may be treated like an arbitration award, with the narrow review described on our page about confirming or vacating an award.

The accountant's authority is usually limited to arithmetic and accounting. Claims that the buyer breached an operating covenant or acted in bad faith generally belong in court or in the arbitration forum the agreement names. An action on a written contract must be brought within four years. (Code Civ. Proc., § 337, subd. (a).) Some agreements shorten that period.

If you are the seller

Ask for the backup. Most agreements give the seller access to the books supporting the earnout statement, and a refusal is useful evidence. Where the records are withheld, a claim for an accounting may be joined.

Separate the two kinds of claim early. One says the number was computed wrongly. The other says the business was run to defeat the number. They may go to different decision makers on different timetables.

Be careful with what you sign. Sellers who stay on as employees are often handed a separation agreement with a general release, which can sweep in the earnout.

Damages are the earnout that would have been earned, and it must be proved with reasonable certainty, as our lost profits page explains. If the evidence shows the buyer never intended to pay, a fraud claim may also be available.

If you are the buyer

A buyer is entitled to run the company it bought. The defense rests on showing that each contested decision had a business reason that existed at the time, and that it was within the rights the agreement gave.

Three habits help. Keep separate financial records for the acquired business through the earnout period, even after integration. Record the reasons for major changes when they are made. Deliver the earnout statement and its schedules on time.

Be careful about withholding an earnout payment to offset an indemnity claim. Read the agreement's set-off terms first. California law lets a party sued for money assert a cross-demand as an offset. (Code Civ. Proc., § 431.70.) A disputed, unproven indemnity claim is still a risky reason to stop paying.

What to bring to the first meeting

Bring the purchase agreement with all schedules, any employment or consulting agreement signed at closing, and the earnout statements. Add your objection letters and the buyer's replies. Financial statements from before and after closing are essential. A dated list of the changes the buyer made is the best starting point.

Frequently asked questions

I sold my company with a two-year earnout and the buyer changed the business so the targets could not be hit. Can I sue for the earnout?

Often you can. In California the claim is breach of the purchase agreement's operating covenants, breach of the implied covenant of good faith, or both. The outcome depends on how much discretion the agreement gave the buyer and whether the changes had real business reasons. Check the objection deadline in the earnout clause before anything else.

We bought a company and the seller claims we sabotaged the earnout by merging it into our operations. What is our exposure?

It depends on the agreement. If it expressly allowed integration in your sole discretion, California's implied covenant generally cannot be used to forbid it. If the agreement was silent or required ordinary-course operation, exposure can reach the full earnout. Records showing the business reasons for each change, made at the time, are the core of the defense.

What is an earnout dispute?

It is a disagreement over deferred purchase price that depends on how a business performs after it is sold. In California these disputes take two forms: accounting arguments about how the metric was calculated, and claims that the buyer operated the business in a way that prevented the targets from being met. Many involve both.

Does a buyer have to maximize the earnout in California?

Not as a general rule. A buyer's duties come from the purchase agreement, so the answer starts with whether it contains an efforts covenant or other operating commitments. Without them, a California seller usually relies on the implied covenant of good faith. That covenant can limit a buyer that uses its discretion in bad faith to defeat the payment. It cannot forbid conduct the contract expressly permits.

How long do I have to sue for an unpaid earnout in California?

The statute of limitations for an action on a written contract in California is four years under Code of Civil Procedure section 337. The contract may set a shorter period. The deadline to object to the earnout statement is far shorter, often a matter of weeks, and missing it can make the buyer's calculation final.

Talk to a California breach of contract attorney

If an earnout was not paid, or a seller is demanding one you believe is not owed, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents sellers and buyers in Orange County, Los Angeles, and throughout California. The firm litigates these disputes and does not handle the sale transaction itself.

This page provides general information about California law and is not legal advice. Outcomes depend on the purchase agreement, the financial records, and the court or arbitrator.