The buyer is offering a high headline price but wants forty percent of it tied to a three-year earnout based on net income. How do we structure this earnout to ensure we do not lose our payout due to their corporate overhead allocations or decisions we cannot control?

Question

Tyler Smith · Accepted Answer

An earnout is often necessary to bridge a valuation gap, but structuring it around net income or EBITDA is a trap. If your earnout is tied to bottom-line profitability, the buyer can easily manipulate that number post-close by allocating corporate overhead, hiring expensive new staff, or charging management fees to your business unit.

To protect your payout, negotiate to have the earnout based on gross revenue or gross margin instead of net income. These top-line metrics are much harder for a buyer to alter through accounting adjustments. If the buyer insists on an EBITDA-based earnout, you must write strict operational covenants into the purchase agreement.

These covenants must protect your operational autonomy. Specify that your leadership team retains control over hiring, marketing spend, and capital expenditures needed to hit the targets. Use your Accountability Chart to define who has decision-making authority over the resources required for the earnout.

Additionally, exclude any parent company overhead allocations, shared service fees, or post-close integration costs from your earnout calculations. By ring-fencing your financial performance and maintaining operational control, you ensure that your earnout remains an achievable incentive rather than an unreachable target.