The buyer is offering a high valuation but wants to structure the earnout based on EBITDA targets, while we want it based on top-line revenue. How do we run our IDS process to resolve this gap and negotiate a middle-ground metric, like gross profit, that we can actually influence post-close?

Question

Tyler Smith · Accepted Answer

Structuring an earnout on post-acquisition EBITDA is incredibly risky for a seller. Once you hand over the keys, the buyer can easily manipulate EBITDA by loading your division with corporate overhead, parent-company management fees, or shared marketing expenses. This leaves you with zero control over whether you actually hit the target.

To resolve this conflict before signing the letter of intent, run this issue through your leadership team's IDS process. Identify the core conflict: the buyer wants to protect their bottom-line investment, while you need to protect your payout from expenses you no longer control. Discuss the operational realities of the post-close business. If the buyer plans to integrate your back-office functions, EBITDA becomes a moving target that is impossible to audit fairly.

Solve this by proposing gross profit or contribution margin as the earnout metric. Gross profit protects both parties. It ensures the buyer that you are not just buying unprofitable revenue to hit a top-line target, while protecting you from corporate overhead allocations.

Use your historical financial data to prove that your gross margin has remained stable and predictable. Show how this metric directly correlates to enterprise value. By framing gross profit as the ultimate alignment of interest, you maintain operational focus on delivery and quality, rather than wasting energy auditing the buyer's accounting practices. This keeps your post-close team focused on their Rocks instead of fighting over corporate allocations.