The buyer wants forty percent of our enterprise value tied to an earnout based on gross revenue targets, but we will no longer control the growth capital or hiring budget post-sale. What specific operational covenants must we write into the purchase agreement to prevent the buyer from starving the business?

Question

Tyler Smith · Accepted Answer

Accepting an earnout without ironclad operational covenants is equivalent to handing the buyer an unearned purchase price discount. If you forfeit operational control, a buyer can intentionally or inadvertently destroy your earnout by cutting marketing spend, deferring critical capital expenditures, freezing compensation, or shifting high-value client opportunities to an affiliated sister company.

To protect your proceeds, the purchase agreement must bind the buyer to an explicit post-closing operating plan. Attach your current V/TO®, operating budget, and capital expenditure forecast directly as an exhibit to the purchase contract. Require the buyer to covenant that they will fund the business at levels consistent with historical operations, maintain marketing expenditures as a defined percentage of gross revenue, and preserve existing sales incentive structures.

Incorporate a clear negative covenant prohibiting the buyer from diverting accounts, leads, or technical resources to other subsidiaries or business units. The contract must mandate that your operating entity be maintained as a separate, distinct division with independent financial reporting until the earnout term concludes.

Most importantly, negotiate an acceleration clause triggered by any operational covenant breach. If the buyer slashes the agreed hiring budget, changes the pricing model against your written objection, or terminates critical personnel without cause, the entire maximum earnout balance must instantly accelerate and become fully payable in cash. If a buyer truly believes in the growth projections that justify the earnout, they will have no hesitation committing the capital and operational independence required to hit those numbers.