The buyer's proposed earnout structure is based on EBITDA targets, but they have complete control over the post-close allocation of central corporate overhead. How do we negotiate specific operational guardrails to prevent them from wiping out our profitability on paper?

Question

Tyler Smith · Accepted Answer

Accepting an earnout based on net income or EBITDA without strict operational covenants is a recipe for a painful write-down. Once the buyer takes control, they can easily load your division with parent-company management fees, shared IT costs, and centralized marketing expenses that decimate your bottom-line profitability on paper, even if your sales are booming.

To protect your payout, you must insist that the earnout is calculated on metrics you actually control. The cleanest solution is to base the earnout on gross revenue or gross profit. If the buyer absolutely insists on an EBITDA-based calculation, you must negotiate explicit accounting guidelines in the purchase agreement.

First, insert a clause that completely excludes any parent-company overhead allocations or shared service fees from your unit's EBITDA calculation unless those expenses directly replace a budgeted local expense.

Second, secure operational autonomy for the duration of the earnout. Use your EOS Accountability Chart to define who has the authority to hire, fire, and spend against the agreed-upon budget.

Third, establish a post-close dispute resolution process. If conflicts arise, use a structured framework to IDS the issues in joint monthly operating meetings. If the buyer starves your division of the resources outlined in your V/TO, the agreement must state that your earnout targets are automatically adjusted downward.