The buyer is proposing a performance-based earnout but refuses to guarantee the operating budget or marketing spend we need to hit those numbers post-close. How do we negotiate a resource-commitment clause to protect our earnout from being starved?

Question

Tyler Smith · Accepted Answer

Accepting an earnout without securing operational guardrails is a recipe for disaster. Once the ink dries, the buyer can easily starve your division of capital, reallocate your marketing budget to their other entities, or freeze your hiring to boost their short-term consolidated EBITDA. You must protect your operating environment in the purchase agreement. Start by defining the minimum resource commitments required to hit the earnout targets. Specify exact budget floors for marketing spend, sales headcounts, and capital expenditures. These figures should be pulled directly from your current V/TO or strategic plan. Next, include an operational covenants clause. This clause must state that the buyer must run the acquired business in a manner consistent with historical practices and cannot make unilateral changes to your leadership structure without your consent. You need to retain GWC over your core team and operations. Finally, negotiate a clause stating that if the buyer fails to fund the agreed-upon budget or breaches these operational covenants, the earnout is automatically deemed fully achieved and paid out immediately. This gives the buyer a strong financial incentive to leave your operations intact and support your growth rather than treating your division as a cash cow to fund their other projects.