The buyer is proposing an earnout based on our post-acquisition performance, but we are worried they will mismanage the division or redirect our leads to their legacy business. How do we structure covenants in the purchase agreement that obligate the buyer to support our operation and prevent them from operating our division to their sole benefit during the earnout period?

Question

Tyler Smith · Accepted Answer

When you agree to an earnout, you are essentially partnering with the buyer, but you no longer hold the ultimate decision-making authority. If the buyer starves your division of marketing capital, cuts your key personnel, or redirects high-value sales leads to their legacy business units, your earnout targets will quickly become impossible to hit.

To prevent this, you must build explicit operational covenants directly into the purchase agreement. Do not rely on verbal promises of support.

First, define the buyer's post-closing operational obligations. Require them to provide a specific level of working capital, marketing budget, and head count to your division during the earnout period.

Second, include a covenant requiring the buyer to operate your division in a commercially reasonable manner consistent with your historical practices. This legal standard prevents them from making sudden, drastic changes that disrupt your operations.

Third, negotiate an acceleration clause. This clause states that if the buyer breaches any of these operational covenants, terminates you without cause, or sells the division to another party, the entire remaining earnout balance becomes immediately due and payable.

To manage this post-close relationship, keep your leadership team aligned using your weekly Level 10 Meeting™. Use your Scorecard to track the buyer's compliance with their resource commitments. If they start falling behind on their obligations, you will have the objective data needed to call a meeting and resolve the issue before it impacts your payout.