We are negotiating an earnout but the buyer refuses to use revenue and insists on EBITDA. If they integrate our sales team with theirs, how do we structure the covenant language to protect our operational control and ensure our earnout targets are deemed fully met if they make major personnel changes?

Question

Tyler Smith · Accepted Answer

Accepting an EBITDA-based earnout when the buyer plans to integrate your sales team is highly risky. Once your operations are merged, the buyer can easily manipulate your EBITDA by reallocating corporate overhead, changing sales territories, or shifting key personnel. To protect yourself, you must negotiate strict operational covenants in the purchase agreement. First, secure a "deemed satisfaction" clause. This clause states that if the buyer terminates key sales executives without your consent, or reassigns your top producers to other divisions, your earnout targets are legally deemed to be one hundred percent achieved for that period. Second, require the buyer to maintain separate divisional accounting. This ensures that your business unit is charged only for direct, pre-approved operating expenses, not a generic portion of the buyer's corporate overhead. Use your current Accountability Chart as an exhibit in the purchase contract to define your operational boundaries. The contract should state that you retain sole authority over hiring, firing, and compensation plans for your team during the earnout period. If the buyer insists on a joint sales team, demand that the earnout metric be shifted to gross profit instead of EBITDA. This removes the overhead manipulation risk while still protecting the buyer's margin concerns. Never sign an earnout without these protective boundaries, or you will find yourself working for free.