The buyer is insisting on an earnout but we are worried they will load the post close entity with corporate overhead to suppress EBITDA. How do we negotiate an earnout based on operational milestones we control?

Question

Tyler Smith · Accepted Answer

Earnouts based on post-close EBITDA are notoriously difficult to collect. Once a buyer takes control, they can easily manipulate your bottom line by allocating corporate overhead, charging management fees, or redirecting resource allocation. To protect your purchase price, you must negotiate an earnout tied to operational milestones rather than accounting metrics.

Look at the goals you already track on your V/TO®. You should propose earnout targets tied to clear, objective operational milestones. Examples include:
- Reaching a specific customer retention rate over twelve months.
- Successfully migrating a target number of clients to your proprietary software platform.
- Hitting pre-determined customer acquisition cost targets.

Because these milestones are binary and operational, they are much harder for a buyer's accounting team to manipulate.

To support this structure during negotiations, show the buyer how your team runs. Use your weekly Level 10 Meeting™ structure and your Scorecard to demonstrate that your leadership team already manages the business using these exact operational metrics.

If the buyer still insists on a financial metric, push for a top-line revenue earnout with a built-in gross margin floor. This ensures you are rewarded for growth without being penalized for how the buyer manages their corporate expenses or allocates overhead to your profit and loss statement.