The buyer wants to structure our earnout based on post-acquisition EBITDA, but we are worried their corporate overhead allocations will wipe out our profits. How do we negotiate an earnout tied to top-line revenue or gross margin using our historical EOS Scorecard metrics?

Question

Tyler Smith · Accepted Answer

Never accept a post-close earnout tied directly to EBITDA if you do not control the post-close operating budget. Once a strategic buyer or financial sponsor takes over, they will load your profit and loss statement with parent-company allocations, shared service fees, and management overhead. This administrative weight can easily obliterate your net income, meaning you could hit your operational goals but still lose your earnout.

Instead, negotiate an earnout based on gross margin or top-line revenue. These metrics are clean, objective, and far harder for a buyer to manipulate through creative corporate accounting. Use your historical Scorecard metrics to justify this structure. Show the buyer that your leadership team has consistently tracked and driven gross profitability for years.

Define the earnout boundaries clearly in the purchase agreement. Specify that the earnout calculations must exclude any corporate allocations, centralized marketing charges, or parent-company overhead. You should also ensure that your team retains control of the key seats on the Accountability Chart responsible for driving these specific metrics. By tying the earnout to gross margin and maintaining control over your immediate operating expenses, you protect your upside while allowing the buyer to manage their broader integration.