The buyer wants to tie our earnout to post-close EBITDA targets, but they will control the allocation of corporate overhead and shared services after the acquisition. How do we structure the earnout metrics to prevent them from using accounting tricks to reduce our payout to zero?

Question

Tyler Smith · Accepted Answer

When you tie an earnout to EBITDA, you are handing the buyer the keys to your financial destiny. Post-close, the buyer will control the ledger. They can load your division with corporate overhead allocations, central service fees, and shared marketing expenses that decimate your operating income on paper. To protect your payout, you must refuse EBITDA as the metric.

Instead, shift the earnout target up the income statement to gross profit or net revenue. These metrics are far harder to manipulate with corporate accounting games. If the buyer insists on an EBITDA metric, you must negotiate a strict list of permitted expenses and explicit exclusions. Insist on a defined list of pre-approved corporate overhead allocations, capped at a fixed dollar amount or a tiny percentage of revenue.

You also need to establish operational covenants that guarantee you the resources to hit those targets. If you do not control your budget, your hiring decisions, or your marketing spend, you cannot be held responsible for missing the numbers. Use your V/TO to define the long-term vision and show the buyer how arbitrary resource cuts will damage the business they just bought. Run these negotiation points through your leadership team as critical issues to solve before you sign.