We agreed to an earnout based on our division's post-close EBITDA, but the buyer's corporate parent plans to charge us a massive corporate overhead allocation for HR, legal, and IT services that we do not need. How do we define and protect our operating margins from these artificial corporate expenses?

Question

Tyler Smith · Accepted Answer

If you accept an earnout based on a standard post-close profit statement without protective covenants, the buyer can easily wipe out your payout by allocating shared corporate overhead costs to your division. You must address this in the purchase agreement by defining a highly customized metric called Earnout EBITDA.

In your transaction documents, explicitly state that your division's operating expenses will be calculated on a standalone basis. This means the buyer cannot charge any parent-level corporate overhead allocations, such as corporate legal fees, centralized marketing, executive salaries, or shared IT infrastructure, to your division's profit and loss statement unless those services directly replace a local operating expense that was already included in your historical budget.

Additionally, include a clause stating that if the buyer forces you to use their centralized vendors, the cost charged to your division cannot exceed your historical cost for those exact same services.

By establishing these strict boundaries, you ensure that your earnout remains tied to your team's actual operational performance, rather than the buyer's internal corporate accounting choices.