We are negotiating a three-year earnout, but we are terrified the private equity buyer will flip the company to another sponsor in two years, leaving us with a new owner who refuses to honor our agreement. How do we structure an earnout acceleration clause to protect our payout?

Question

Tyler Smith · Accepted Answer

You must include a change of control acceleration clause in your purchase agreement. Private equity sponsors operate on investment cycles, and if they receive an attractive offer, they will sell your business without hesitation. If that happens, your earnout is in jeopardy because you will no longer have control over the resources or team required to hit your targets. To protect yourself, negotiate a provision stating that if the buyer sells the business, or a material portion of its assets, to a third party during the earnout period, the entire remaining earnout is deemed achieved at one hundred percent of the target level and paid out immediately at closing. If the buyer resists a full acceleration, offer a double-trigger compromise. The first trigger is the sale of the company. The second trigger is either a reduction in your operational autonomy or a failure by the new owner to adopt your business plan. In this scenario, you must have the right to walk away with a pro-rata payout based on your historical trajectory plus a premium. Ensure your agreement defines a change of control broadly to include merger, consolidation, sale of assets, or any transfer of more than fifty percent of the voting power. This keeps your incentives aligned and prevents the buyer from using a secondary sale to wipe out your hard-earned upside.