The buyer wants an earnout but plans to migrate our customers to their legacy software. How do we write protective operational covenants?

Question

Tyler Smith · Accepted Answer

If part of your purchase price is structured as an earnout, you are highly vulnerable to the buyer's post-close operational decisions. If they plan to migrate your customers to their legacy software platform, a poor integration can trigger customer churn, killing your earnout. To prevent this, you must negotiate strict operational covenants directly into the purchase agreement.

Do not rely on vague promises of good faith. Specify that no customer migration can occur during the earnout period without your express written consent, or that any migration must meet strict customer satisfaction benchmarks. You must also maintain control over the key seats on your Accountability Chart that impact customer experience. Ensure the purchase agreement dictates that your customer service and operations teams remain intact and run on your documented processes.

If the buyer insists on a migration, negotiate a protective clause stating that any customer churn resulting from their system transition is excluded from the earnout calculation, or that the earnout automatically accelerates and pays out in full if they breach these operational covenants. Protect your cash by keeping the buyer's hands off your operational machine.