The buyer proposes a three-year earnout with annual EBITDA targets, but any missed year is permanently lost even if cumulative three-year profit exceeds the total plan. How do we negotiate cumulative catch-up provisions and immediate acceleration triggers upon a subsequent sale of the company?

Question

Tyler Smith · Accepted Answer

Never sign an earnout structured with annual binary cliffs. If supply chain disruptions or post-merger integration blunders suppress earnings in Year 1, you can beat the Year 2 and Year 3 targets by fifty percent and still lose one-third of your deferred compensation. You must insist on cumulative catch-up mechanics.

A cumulative catch-up provision recalculates aggregate performance at the conclusion of the earnout period. If your targets are two million dollars in EBITDA per year for three years, your cumulative hurdle is six million dollars. If you generate 1.2 million in Year 1, 2.4 million in Year 2, and 2.8 million in Year 3, your annual cliff would have forfeited your Year 1 payout. Under a cumulative provision, your total EBITDA of 6.4 million clears the three-year target, triggering a mandatory true-up that pays out the forfeited Year 1 proceeds in full.

Additionally, you must demand a change-of-control acceleration clause. Private equity platforms frequently flip businesses or recapitalize their balance sheets earlier than planned. If the buyer sells the company, divests your division, or undergoes a change in controlling ownership before the earnout term ends, the full remaining earnout amount must accelerate and become immediately payable at one hundred percent of target value.

From an operational standpoint, running on EOS gives your leadership team the discipline to hit these milestones. Establishing clear quarterly Rocks around earnout targets keeps your team aligned on the specific drivers that protect your payout.