The buyer is offering a performance-based earnout but wants to base it on GAAP metrics that our internal team cannot easily track. How do we negotiate an earnout structured around non-financial operational milestones, like achieving weekly Scorecard targets or completing specific strategic Rocks, to keep the payout under our control?

Question

Tyler Smith · Accepted Answer

Structuring an earnout around GAAP financial metrics often leads to post-closing disputes because buyers can adjust their accounting policies to depress your net income. To protect your payout, you should negotiate an earnout tied to non-financial operational milestones that are easily tracked.

Identify these milestones using your weekly EOS® Scorecard metrics and quarterly Rocks. These can include metrics such as customer acquisition targets, specific production volume goals, or employee retention rates. These operational metrics are objective and difficult for a buyer's corporate accounting team to manipulate.

Incorporate these operational targets directly into the definitive purchase agreement. Specify that the earnout payout is triggered when your team hits these specific Scorecard averages over agreed upon intervals.

Ensure that your leadership team retains operational control over the departments responsible for these metrics. Use your weekly Level 10 Meetings™ to monitor progress and keep your team focused on hitting these targets.

By shifting the earnout metrics from complex accounting definitions to transparent operational milestones, you simplify the verification process. This structure keeps the control of your payout firmly in your hands.