The buyer is relocating our warehouse post-close, which will inflate overhead. How do we protect our gross-profit-based earnout?

Question

Tyler Smith · Accepted Answer

If you agree to an earnout based on gross profit or EBITDA, you are exposing yourself to the buyer's post-close operational decisions. A classic trap occurs when a buyer integrates your business and reallocates their high overhead costs, such as relocating your efficient warehouse to their expensive legacy facility, wiping out your margins and destroying your earnout. To prevent this, you must negotiate strict operational and accounting guardrails in the purchase agreement.

First, insist that your post-close financial performance be measured on a standalone basis, using the exact same accounting policies and cost-allocation methodologies used historically. Second, negotiate a cost-allocation freeze. The agreement must state that any corporate overhead charges, shared service allocations, or relocation expenses imposed by the buyer are completely excluded from your earnout calculations.

Third, establish that your leadership team retains operational control over key decisions, like vendor selection and staffing levels, during the earnout period. Use your V/TO® and existing Accountability Chart to outline these boundaries. If the buyer insists on making major operational changes that negatively impact your margins, the purchase agreement must dictate that your earnout targets are automatically adjusted downward to offset their interference.