The buyer wants to tie thirty percent of our purchase price to a two-year earnout based on total ARR, but our product development roadmap dictates sales timing. Can we structure an earnout around operational delivery milestones instead of top-line revenue, and how do we enforce it?

Question

Tyler Smith · Accepted Answer

Yes, operational milestone earnouts are common when future enterprise value depends on technology deployment, regulatory clearance, or production capacity rather than immediate sales volume. Revenue-based earnouts often penalize sellers when a buyer mishandles marketing or reorganizes the sales department post-closing. Operational milestones keep the measurement inside your operational control.

To make an operational earnout enforceable, define binary, objective targets that cannot be distorted by buyer accounting choices. Examples include the successful rollout of a major software architecture release to active production, securing SOC 2 Type II compliance, or hitting a targeted manufacturing throughput rate measured over sixty consecutive operating days. Avoid subjective language such as buyer satisfaction or commercial viability.

Structure the contract with precise operational covenants. The buyer must commit to maintaining a specified budget, retaining designated personnel on the Accountability Chart, and providing reasonable commercial resources. If the buyer starves the initiative of capital, reallocates your engineering leads to other projects, or cancels product launches, the milestone must be deemed fully achieved and the payout accelerated.

Assign clear ownership for each milestone target, treating each one like a critical company Rock. The purchase agreement should stipulate an independent technical referee, rather than an accounting arbitrator, to verify milestone completion within thirty days of notice. If the buyer contests the operational result, the technical referee inspects the operational deliverable and renders a final, binding determination.