The buyer wants an EBITDA-based earnout but plans to consolidate our back office into their larger corporate portfolio. How do we draft operational covenants to stop them from starving our division of resources and tanking our targets?

Question

Tyler Smith · Accepted Answer

Consolidation is the fastest way for a buyer to manipulate an EBITDA-based earnout. When they merge your accounting, marketing, or IT into their corporate structure, your direct control over operating expenses disappears, and your earnout target is compromised. You must protect yourself by negotiating strict post-close operational covenants. First, require the buyer to calculate your earnout on a stand-alone basis using historical accounting practices. Any shared corporate overhead allocations must be capped or completely excluded from your business unit's EBITDA calculation. Second, secure resource guarantees. Define the exact headcounts, marketing budgets, and capital expenditures the buyer must provide to your division during the earnout period. Use your V/TO and current operational budget as the baseline for these requirements. Third, secure operational veto rights for your designated manager, who should be your Integrator or another trusted leadership team member. They must have the final say on hiring, firing, and product pricing within your business unit. If the buyer breaches these covenants, the purchase agreement must dictate that the entire remaining earnout balance becomes immediately due and payable. Do not rely on verbal promises of synergy; get these operational boundaries written directly into the definitive transaction documents.