The buyer is offering a high headline multiple but wants to lock thirty percent of it in an earn-out based on future EBITDA targets, while simultaneously planning to integrate our back-office functions. How do we structure the deal to prevent their corporate overhead allocations from destroying our earn-out?

Question

Tyler Smith · Accepted Answer

An earn-out is often used to bridge a valuation gap, but it can quickly become a trap if the buyer intends to integrate your operations. If your earn-out is based on future EBITDA targets and the buyer consolidates your back-office, they can easily manipulate your profitability by allocating corporate overhead expenses, changing accounting methodologies, or redirecting your sales pipeline to their other subsidiaries.

To protect your payout, you must negotiate strict operational covenants in the purchase agreement. First, base the earn-out on gross margin dollars or top-line revenue rather than EBITDA. This prevents the buyer from depressing your bottom line with corporate cost allocations.

If the buyer insists on an EBITDA-based earn-out, you must secure a covenant that prohibits the allocation of parent-level overhead expenses to your business unit during the earn-out period. Additionally, insist on maintaining operational control over your key resources.

Use your EOS® Accountability Chart to define exactly who retains hiring, firing, and spending authority post-close. If you lose control of your team or your resources, you lose control of your earn-out. By securing these operational protections in the deal structure, you ensure your post-close performance reflects your team's actual success, not corporate accounting adjustments.