The buyer wants to cap our earnout payout but leave the downside uncapped if we miss targets by even a fraction. How do we negotiate a sliding scale or catch-up provision to protect our payout?

Question

Tyler Smith · Accepted Answer

When a buyer structures an earnout, they often try to make it an all or nothing game. If you hit ninety nine percent of the target, they want to pay you zero. To protect your enterprise value, you must negotiate a sliding scale and a catch-up provision.

First, establish a floor. If you hit eighty percent of the target, you should receive eighty percent of that year's earnout installment. Do not accept a cliff where missing a Rock by a hair wipes out millions in value.

Second, build in a cumulative catch-up clause. If you miss the EBITDA target in year one because of a temporary integration delay but blow past the target in year two, the excess performance must apply to the year one shortfall. This ensures you are rewarded for the total value created over the entire earnout period rather than being penalized for short-term timing issues.

During your Level 10 Meetings, track your progress using a clear dashboard. If the buyer controls the operations post-close, you must also secure veto rights over changes to your pricing, marketing spend, or hiring plans. If they starve your team of resources, they will tank your capacity to execute.

In your letter of intent, define the earnout metrics using simple accounting principles. Specify that any calculation must exclude corporate overhead allocations and transaction-related expenses. Your objective is to keep the target clean, predictable, and fully aligned with what your team can control on the Accountability Chart.