The buyer is proposing a deal where a quarter of our valuation is tied to a post-close earnout based on operating EBITDA, but they will have full control over corporate overhead allocations. How do we structure the definition of EBITDA in the purchase agreement to prevent them from wiping out our earnout with arbitrary parent-company expenses?

Question

Tyler Smith · Accepted Answer

An earnout tied to post-closing EBITDA is a trap unless you establish strict operational boundaries. Once the transaction closes, the buyer will integrate your business into their corporate structure, which often involves loading your profit and loss statement with allocated corporate overhead, parent-company legal fees, and centralized management charges. These allocations can easily wipe out your EBITDA and destroy your earnout payout. To protect your money, you must negotiate a detailed definition of post-closing EBITDA in the purchase agreement. Demand that your business unit be run as a separate division with its own independent P and L for the duration of the earnout period. The purchase agreement must explicitly exclude any corporate overhead allocations, shared service fees, or parent-company debt service from your EBITDA calculation. Specify that your EBITDA will be calculated using the exact same accounting methodologies and historical policies used during your pre-sale Quality of Earnings audit. Additionally, secure operational covenants that protect your budget. If the buyer starves your team of the marketing budget or headcount necessary to hit your targets, the agreement must stipulate that your earnout targets are automatically adjusted downward. Use your EOS® Accountability Chart to retain hiring authority over the roles essential to hit those targets, ensuring you retain the operational control necessary to secure your payout.