The buyer is insisting on a high earnout percentage based on net income, but we want it tied to gross revenue or gross margin because we do not trust their corporate accounting allocations. How do we negotiate the earnout metrics to protect our payout?

Question

Tyler Smith · Accepted Answer

Tie your earnout strictly to top line revenue or gross margin rather than net income. Buyers love net income earnouts because they can load your operating unit with corporate overhead, centralized management fees, and shared marketing expenses. These accounting adjustments will rapidly wipe out your bottom line profitability targets, leaving you with zero payout despite hitting your operational goals. To protect your hard work, push for a gross revenue or gross margin metric. If the buyer insists on an EBITDA or net income target, you must negotiate a detailed definition of modified EBITDA in the purchase agreement. This definition must explicitly exclude any allocated parent company overhead, transfer pricing adjustments, and capital expenditures that you do not directly control. From an EOS® perspective, this is about keeping your numbers clean. Your leadership team needs to track these targets in your weekly Level 10 Meeting™ without worrying about corporate accounting tricks. Agree on a clear, ring-fenced operating budget for the earnout period. Secure operational autonomy in the definitive agreement so you still have the GWC™, meaning the get it, want it, and capacity to do it, to run your division your way. If the buyer has the power to change your sales strategy or cut your marketing spend post-close, they can easily cause you to miss your targets. Keep the metrics simple, measurable, and independent of their corporate ledger.