M&A Stories
February 4, 2026
One Question: When a large strategic buyer demands total control over your business operations, have you secured objective requirements that prevent them from dismantling the sales engine required to pay your earnout?
The controlling owner of a firearm silencer company sold his business to a large strategic buyer for ten million dollars in cash and a seventeen million dollar earnout. This earnout was based on the business reaching specific sales targets over three years. During negotiations, the large buyer praised the owner and his management team, calling them the essential component of the company’s future success.
To protect the earnout, the owner negotiated a provision requiring the buyer to consult with him before making any decisions that would negatively impact the payout. However, the buyer maintained sole discretion over all business operations and insisted that the owner and his staff remain at-will employees. Internal records later revealed that while the buyer was being complimentary during meetings, they were internally projecting that the sales targets would not be met and were planning to remove the owner shortly after the deal closed.
Forty-one days after the closing, the buyer terminated the owner. Because the owner was the person designated for the consultation right, his termination effectively removed the only check on the buyer’s decision-making. The buyer then proceeded to fire the sales team and shutter the company’s primary facility. The business eventually produced only a fraction of the revenue required to trigger the earnout.
The owner sued for fraud and breach of contract. The court dismissed the fraud claim, ruling that the buyer’s expressions of optimism were not statements of fact and that the written contract gave the buyer the right to run the business as it saw fit. The court allowed the breach of contract claim to proceed only because the buyer dismantled the business so quickly that it created a factual question about whether they acted with the specific purpose of avoiding the payment.
An important procedural note for sellers is that this case was heard in an Idaho court despite a Delaware forum selection clause. The Idaho Supreme Court previously ruled that Idaho public policy prevents a buyer from forcing an Idaho-based business to litigate in Delaware. This home court advantage was critical for the owner, as it kept the case in a forum that could scrutinize the buyer’s rapid dismantling of the local business.
This case demonstrates the risk of agreeing to an earnout with a large strategic buyer without including objective buyer covenants. A consultation right is insufficient if the buyer has the power to fire the consultant at any time. When a large buyer refuses to commit to specific headcount levels or resource allocations, the earnout becomes illusory.
To manage this risk, a seller must replace soft consultation rights with hard contractual requirements. These should include a provision that the owner and key sales employees can only be terminated for cause during the earnout period. Crucially, the definition of cause should be limited to objective misconduct—such as theft or felony convictions—and must explicitly exclude performance-based metrics. By removing the buyer’s ability to fire staff for poor performance, you prevent them from thinning the sales ranks to avoid the earnout. If a large strategic buyer refuses to accept these objective hurdles, the seller should assume the earnout will not be paid.
Case Reference: Case No. 1:18-cv-00035-REP., United States District Court, D. Idaho (January 23, 2026)
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law in lower middle market private target deals.
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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