The buyer is proposing a three-year earnout, but we are worried they might flip the company to a larger private equity firm or strategic buyer before the earnout period ends. How do we structure the change of control provisions to ensure we get paid out fully if they sell the business?

Question

Tyler Smith · Accepted Answer

When agreeing to a multi-year earnout, a change of control of the buyer is one of your greatest risks. If the buyer sells your business to another entity, your ability to hit your targets is completely compromised as systems, leadership, and resources shift. To prevent your earnout from being wiped out, you must negotiate an acceleration clause in the purchase agreement. This clause must dictate that if the company is sold, merged, or undergoes a change of control before the end of the earnout period, the entire remaining earnout balance becomes immediately due and payable at one hundred percent of the target payout. Do not accept a pro-rata payout based on the time elapsed. The buyer chose to exit, and that strategic decision should not cost you your valuation. To justify this, show the buyer how your leadership team uses the V/TO to plan long-term strategic execution. Prove that your three-year plan relies on stable ownership to hit those milestones. If they disrupt that stability by selling, they must buy you out of the risk. You should also ensure that the definition of a change of control includes any restructuring where the key people on your Accountability Chart are stripped of their operational authority, as this represents a de facto change of control that ruins your ability to hit the earnout targets.