We are negotiating a thirty percent earnout based on gross profit targets, but we are terrified the buyer will change our product pricing or reallocate our key developers after closing. How do we write operational covenants into the purchase agreement to protect our autonomy and secure our payout?

Question

Tyler Smith · Accepted Answer

Earnouts are notoriously difficult to collect because buyers often change your operating structure, pricing, or resources post-close. If you agree to an earnout, you must protect your operational autonomy with strict covenants. Without these protections, the buyer can make decisions that destroy your ability to hit your milestones while you are powerless to stop them.

To secure your earnout, tie the milestones to top-line revenue or operational throughput metrics rather than net income, which is easily manipulated by corporate overhead allocations. Next, negotiate specific operational covenants that must remain in place during the earnout period.

These covenants should include:
- Retention of your leadership team and their current seats on the Accountability Chart.
- Maintenance of your current product pricing and sales model.
- Guaranteed access to a specified marketing and development budget.
- Direct control over hire and fire decisions within your department or subsidiary.

Additionally, include an acceleration clause in the purchase agreement. This clause should state that if the buyer breaches any of these covenants, or if they sell the company before the earnout period ends, the entire earnout balance becomes immediately due and payable. By putting these operational guards in place, you ensure that the systems and team that built your success remain intact to deliver your payout.