The buyer offers a top-line revenue earnout over three years, but they demand full discretion over our post-close operating budget and sales compensation plans. What specific negative covenants and operational guardrails must we write into the purchase agreement to protect that revenue?

Question

Tyler Smith · Accepted Answer

A top-line revenue earnout is safer than a net income earnout, but it is completely vulnerable if the buyer cuts marketing budgets, reallocates sales reps, or alters product pricing post-closing. If you tie significant consideration to a three-year revenue target, you must secure operational covenants that prohibit the buyer from sabotaging the operational engine that produces that revenue.

Your definitive agreement must incorporate specific negative covenants and operating standards. Specifically, require that the buyer:

- Maintains annual sales and marketing expenditures at a percentage of revenue equal to or greater than your trailing three-year average.
- Preserves the existing commission and incentive compensation structure for sales roles defined on your Accountability Chart, preventing management from gutting rep motivation.
- Retains core pricing formulas and discount thresholds without unilateral increases that drive existing customers to competitors.
- Provides adequate working capital and inventory reserves so delivery teams do not face operational bottlenecks that delay revenue recognition.

Include language requiring the buyer to operate the business in the ordinary course consistent with past practice and to use commercially reasonable efforts to maximize the earnout payout, rather than simply avoiding bad faith.

Finally, negotiate an acceleration clause. If the buyer decides to discontinue a core product line, rebrand your offering, terminate key sales leaders without cause, or sell the division to another entity, the entire maximum earnout must accelerate and become immediately payable in cash. Without these teeth, you are offering a seller-financed discount disguised as a performance bonus.