The buyer is offering our target valuation but only if we agree to a three-year earnout tied to net income targets. How do we negotiate structural protections like acceleration clauses and post-close operational covenants to ensure they do not starve our business unit of capital to avoid paying us?

Question

Tyler Smith · Accepted Answer

An earnout is a tool to bridge a valuation gap, but without strict operational protections, it is a trap. If you tie your earnout to net income or EBITDA, a buyer can easily use corporate overhead allocations, management fees, and internal accounting games to wipe out your payout. To protect your money, you must restructure the earnout terms. - Insist on basing the earnout on top-line revenue or gross margin rather than net income. This prevents the buyer from inflating operating expenses to depress your numbers. - Negotiate an acceleration clause that triggers an immediate payout of the remaining earnout if the buyer sells the company, terminates your key leaders, or materially changes your operational control. - Secure explicit operational covenants. These covenants must guarantee that the buyer will provide the necessary working capital, marketing support, and headcount to hit your targets. You must retain the authority to run your division post-close. Use your EOS framework as a shield. Specify in the purchase agreement that your team will continue to run on its established Accountability Chart and execute its quarterly Rocks. If the buyer starves your business unit of resources or interferes with your automated workflows, the contract must state that the earnout is deemed fully achieved. Never sign away your operational control without a guaranteed payout.