The buyer wants to tie thirty percent of our enterprise value to a three-year earnout, but we are worried they will starve the business of working capital post-close to suppress our payout. How do we structure protective operational covenants and capital allocation guarantees in the purchase agreement to prevent this?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an earnout but plans post-close operational integration, you must protect your payout from their potential mismanagement or under-funding. Strategic buyers often choke acquired business units by centralizing back-office functions, starving them of working capital, or redirecting leads to their legacy segments.

To prevent this, you must negotiate strict operational covenants directly in the purchase agreement. Do not allow your post-close entity to be buried in their corporate hierarchy. Require the buyer to maintain your business as a separate operating division with its own discrete financial statements.

Ensure the agreement mandates that your business unit receives a guaranteed baseline of working capital. This allocation must be sufficient to support the growth targets required to hit your earnout milestones. Specify that your leadership team retains control over hiring and firing decisions for your key seats on the Accountability Chart. This prevents the buyer from gutting your operations team to hit their own short-term corporate synergy targets.

Additionally, build a protection clause that triggers an immediate, automatic acceleration of the maximum earnout payout if the buyer violates these operational covenants. You should also include a clause stating that any allocated corporate overhead from the parent company is excluded from your earnout EBITDA calculation. By establishing these hard operational boundaries, you ensure that your team has the resources and autonomy to hit your milestones without interference.