If we agree to an earnout covering thirty percent of our enterprise value, what specific acceleration triggers and covenant defaults must we write into the purchase agreement to prevent the buyer from undermining the payout?

Question

Tyler Smith · Accepted Answer

An earnout without contractual acceleration triggers is simply an interest-free donation to the buyer. Once the transaction closes, the buyer controls capitalization, debt leverage, and operational priorities. If their business hits liquidity distress or they decide to pivot company strategy away from your division, your earnout will fail unless your purchase agreement explicitly defines acceleration events that trigger immediate full payment.

You must require full, non-negotiable earnout acceleration upon the occurrence of three primary events:

- Change of Control: If the buyer sells the company, transfers majority equity, or sells substantially all operating assets to a third party during the earnout period, the entire maximum earnout must become immediately due and payable prior to or at closing.
- Constructive Termination or Loss of Authority: If the buyer terminates your operational leadership without cause, materially demotes key managers, reduces agreed operating budgets, or breaches designated autonomy covenants, the earnout must immediately convert to a fixed debt obligation payable in cash.
- Financial Default: If the buyer defaults on senior bank debt, misses scheduled interest payments on seller notes, or files for bankruptcy reorganization, your earnout must accelerate and rank alongside senior unsecured creditor claims.

Additionally, incorporate a deemed achievement clause. If the buyer fails to provide audited quarterly financial statements or prevents you from reviewing detailed general ledgers within forty-five days of period end, the earnout targets for that period must be deemed achieved in full.