The buyer is proposing a three-year earnout based on net income, but we are terrified that their post-close corporate overhead allocations and shared service fees will artificially depress our profitability and wipe out our payout. How do we structure the financial definitions in the purchase agreement to ensure our earnout is tied strictly to operating metrics we actually control?

Question

Tyler Smith · Accepted Answer

An earnout based on net income is a trap. Once the transaction closes, the buyer controls the ledger. They can easily load your division with parent-company overhead, shared marketing expenses, and corporate executive salaries, quickly wiping out your paper profitability. You must refuse any earnout based on net income or net profit.

Instead, negotiate an earnout structured on gross margin dollars or top-line revenue targets. If the buyer absolutely insists on a profitability metric, use Earnings Before Interest, Taxes, Depreciation, and Amortization, but explicitly define it as a standalone, un-allocated business unit EBITDA. This means the calculations must exclude any parent-company overhead, corporate allocations, or centralized service fees that your division did not directly incur prior to the acquisition.

To make this operational, use your existing EOS® Scorecard. Identify the three to five key weekly numbers that drive your gross margin and write those directly into the definitive agreement as the operating guardrails. Require the buyer to maintain your independent accounting system for the duration of the earnout period.

You must also secure veto power over any changes to your operating budget or personnel decisions that could impact your ability to hit these targets. If they consolidate your team or change your delivery model, the earnout must automatically accelerate and pay out at one hundred percent. This keeps your payout tied to your operational execution, not the buyer's creative accounting.