The buyer is offering a high headline purchase price but wants forty percent of it structured as a performance-based earnout over three years. How do we negotiate the operational covenants in the purchase agreement to prevent them from choking our resources and missing the targets?

Question

Tyler Smith · Accepted Answer

An earnout is only as good as your operational control post-close. If a buyer controls your budget, your staffing, and your marketing spend, they can easily starve your business unit and avoid paying the earnout. You must protect your upside by negotiating tight operational covenants in the purchase agreement.

First, base your earnout on top-line revenue or gross margin, never on net income or EBITDA. Buyers can easily manipulate net income by allocating corporate overhead, technology costs, or management fees to your division. Gross margin or revenue is much cleaner and harder to distort.

Second, secure an operational ring-fence. The purchase agreement must guarantee that your business unit will receive a minimum level of working capital, marketing budget, and headcount support post-close. You must retain the authority to hire, fire, and direct your team, using your existing EOS Accountability Chart as the blueprint for decision-making.

Third, include an acceleration clause. If the buyer sells the company, terminates your employment without cause, or materially breaches the operational covenants, the entire earnout must immediately accelerate and become payable. Do not rely on goodwill or verbal promises. Ensure that your post-close operational boundaries are explicitly detailed in the definitive legal documents.