The buyer is proposing an earnout based on our gross profit margin, but our operations team is structured to drive overall company profitability. How do we structure this earnout to match our operating model?

Question

Tyler Smith · Accepted Answer

Agreeing to an earnout based on gross profit margin can be incredibly dangerous if your leadership team does not have full control over the inputs that determine that specific metric. To prevent the buyer from manipulating your post-close payout, you must align the earnout metrics directly with your Accountability Chart and your existing operational rhythm. Your leadership team must possess the authority and the tools to impact the metric they are being measured against. If your team is structured to drive bottom-line profitability through expense management and automation, an EBITDA-based metric is often more appropriate than gross margin. Use your weekly Level 10 Meeting™ and scorecard to track the exact drivers of the earnout. If the buyer insists on a gross margin target, you must negotiate strict governance provisions that define how costs are allocated to cost of goods sold. Ensure that any shared corporate overhead from the buyer cannot be dumped into your business unit to artificially depress your margins. By grounding the earnout terms in your established operating system and the actual seats on your Accountability Chart, you ensure your team can execute the plan without interference.