When pandemic revenue counts: A $9.7M earnout lesson

A Quebec uniform company pivoted to manufacturing medical gowns during COVID-19 and took in $191 million in pandemic-related sales in a single fiscal year. Its vendors’ earnout, tied to EBITDA, suddenly looked like a windfall. The purchaser said those sales had nothing to do with the business it paid for. Both sides read the same EBITDA definition, but only one could be right. In Clearspring Capital Partners II c. Logistik Unicorp Holdings Inc., 2026 QCCS 1092 [Clearspring], $9.7 million turned on two words that nobody had defined.

How did a uniform company end up in a $9.7M earnout dispute?

When the vendors of Logistik Unicorp Inc., a Quebec uniform and workwear supplier, signed their share purchase agreement back in August 2018, their deal included up to $15 million in earnout compensation tied to the company’s EBITDA for fiscal years 2020 and 2021. Nobody around the table (or the Teams call) was thinking about medical gowns or nitrile gloves. Safe to say, nobody had any thought about including the “global pandemic” in the disclosure schedules.

When March 2020 arrived, a company that had never sold medical protective equipment suddenly found itself manufacturing gowns for the Government of Canada and sourcing gloves for Quebec hospitals, taking in roughly $191 million in medical sales in a single fiscal year. For the vendors, their earnout looked like a sure thing, but for the purchaser, it looked like a pandemic-shaped windfall that had nothing to do with the business they paid for.

The purchaser owed the earnout if EBITDA cleared $34 million in either year or $68 million between the two years combined. When excluding the medical sales and pandemic wage subsidies, the combined EBITDA was approximately $43 million but including them put it at approximately $86 million. [1] The independent accountant appointed under the purchase agreement’s expert determination clause ultimately sided with the vendors, finding that the sales were ordinary revenue and that they recurred. The court was only able to review the independent accountant’s report for “manifest error,” found none, and ordered the purchaser to pay roughly $9.7 million plus interest and costs. [2]

Why is every earnout really a risk-allocation mechanism?

Earnouts are usually explained by advisors as a way to bridge a valuation gap. That is true from a pure financial perspective, but an incomplete assessment when evaluating the terms in a transaction’s definitive agreement. Every earnout formula and its definitions are truly a decision about who carries the risk, who keeps the reward and most importantly what happens after closing.

Each exclusion to an EBITDA definition is a small allocation of that risk. If the parties do not decide prior to signing who gets the benefit of an unexpected event, someone else will have to decide later. Whether it be the “Expert”, the “Independent Accountant” or a court, such individual will be working with hindsight and without the true commercial context that shaped the deal in the first place.

Four lessons for your next earnout

1. Define every exclusion with a test, not a label.

The purchase agreement excluded “non-recurring gains” and “one-time” income from EBITDA but failed to define either phrase. [3] Left to ordinary meaning, the independent accountant found that sales made to multiple customers, under multiple contracts, across more than one fiscal year were simply not “one-time.” [4] The court agreed, noting that however the sales were described, they could not be characterized as one-time income.

The purchaser almost certainly understood “non-recurring” to mean “not part of the business we bought”, but the purchase agreement never said so. If that is the intended meaning, it is advisable for lawyers, working alongside accounting advisors, to draft a test the independent expert can apply rather than a common word it must interpret.

2. Tie “ordinary course” to a fixed reference point.

The purchaser argued that a uniform company selling medical gowns was obviously outside its ordinary business, but the company’s own record suggested otherwise. In 2016, the company had filled a short-term Government of Canada order for winter coats for refugees arriving in Canada, and the vendor due diligence report described chasing such bulk opportunities as “part of normal business.” [5] That history helped persuade the independent accountant that seizing a pandemic opportunity was what the company did, not an exception to it.

A vendor’s sales materials are written to show a nimble, fruitful and opportunistic business. Years later, those same words can define (where not otherwise defined) the ordinary course of a business. Purchasers who want to carve out opportunistic revenue should tie the concept to something fixed, such as the business plan or the products described in the confidential information memorandum, or list excluded categories outright like emergency government programs, new product lines and acquired businesses.

3. Specify what controls the earnout, the definition or the financial statements.

Perhaps the most striking detail in the case is that the company’s 2021 audited financial statements, prepared after the purchaser took control, described the contracts as “one time, non-recurring”, but it made no difference. The court found that the note was drafted after the vendors had already objected, and that letting management’s adjectives bind the independent accountant would render the agreed process “largely meaningless.” [6]

The lesson is that characterizations in financial statements, board minutes or management commentary are evidence, not answers. If the parties want an accounting treatment to control the earnout, the agreement must say so. Every position taken during the dispute process should be checked against the earnout’s definition before it is put in writing or used to support a claim.

4. Set the expert’s mandate, qualifications, and standard of review before signing.

Many dealmakers assume a court will step in if the accountant gets it wrong. It usually will not. The parties made the independent accountant’s determination final and binding “absent manifest error,” and the court read that as a deliberately narrow exception. [7] The error had to be obvious, clearly wrong and capable of changing the result. A competing expert report that simply redid the analysis did not qualify. [8]

The purchaser’s late challenges fared no better. Its objections to the independent accountant’s credentials failed because both sides had agreed to the appointment before the process began. [9] Its complaint about sworn statements from former executives failed because it had let the process finish in the hope of a better result rather than seeking relief at the time. [10]

This reinforces that it is important to determine at signing what the expert will decide and what standard of review applies, and to raise procedural concerns while the process is still running. “Manifest error” is a narrow door, not a second chance to argue the numbers.

Why the decision matters beyond Quebec

Clearspring fills a real gap in Canadian law. The court observed that there is little Canadian case law on how courts review expert determinations and that English courts have provided more useful guidance. [11] It drew on that English authority alongside decisions of the Ontario Court of Appeal, the Alberta courts and the Delaware Superior Court. [12] The fact that a civil law court reached the same conclusions as these common law courts points to a consistent approach across Canada and beyond.

The clause at issue was also far from unusual. The court noted that an Alberta decision had considered an expert clause drafted in virtually identical terms. [13] If a precedent share purchase agreement states that the accountant’s determination is “final and binding and not subject to appeal, absent manifest error,” this decision speaks directly to that clause.

What’s the one question to ask before signing?

The parties in Clearspring agreed to an accounting exercise that was supposed to take 30 days. Instead, they ended up in a dispute that began in 2020 and was not resolved until 2026. The company’s own audited financial statements called the revenue non-recurring, and it made no difference. The purchase agreement decided what counted, and $9.7 million turned on two words that nobody defined.

Before your next signing, it is worth reading the EBITDA definition and asking a simple question. If the company had a year that nobody planned for, who would get paid? If the answer depends on an undefined term, the parties have not allocated the risk, they have only postponed the argument.

How Miller Thomson can help

Earnout disputes turn on drafting choices made months or years before the conflict surfaces. Miller Thomson’s Mergers & Acquisitions lawyers advise purchasers, vendors, and their counsel on structuring earnout mechanisms, defining EBITDA for post-closing purposes, and managing expert determination processes. If you are negotiating an earnout or facing a dispute over one, contact our team to discuss your situation.

[1] Clearspring, at para 31.

[2] Clearspring, at paras 254-259.

[3] Clearspring, at para 17.

[4] Clearspring, at para 185.

[5] Clearspring, at paras 130-133.

[6] Clearspring, at paras 163-164.

[7] Clearspring, at paras 64-69.

[8] Clearspring, at para 141.

[9] Clearspring, at para 210.

[10] Clearspring, at para 249.

[11] Clearspring, at paras 52.

[12] Clearspring, at paras 54, 56, 65 and 71.

[13] Clearspring, at para 62.